Strategic Responses to Regulatory Threat in the Credit Card Market
In November 1991, federal lawmakers threatened to place a binding cap on credit card
interest rates. I find that credit card rates declined following the regulatory threat, more
so for larger and more politically visible credit card issuers. A set of stock market event
studies reveals that interest rate cuts announced after the threat led to positive abnormal
returns, both for announcing issuers and their rivals. This pattern does not exist for
similar rate cuts made outside the period of regulatory threat. The results suggest that
firms may experience private benefits to price-cutting when doing so mitigates regulatory
threat, and spillover benefits when another firm cuts prices in order to ease regulatory
threat.