Vaping and Tobacco: An Event Study of Federal E-Cigarette Regulation

Abstract

On July 27, 2017, the FDA announced its new comprehensive plan to regulate nicotine consumption, initiating a period of significantly increased federal regulatory pressure on the e-cigarette market. Media coverage of the regulatory discussion suggests that these new e-cigarette control policies will have a substantial impact on the performance of major cigarette producers such as Altria and Reynolds American. I propose a theoretical model of the impact of e-cigarette regulation on tobacco firms that predicts two opposing effects: wealth gains based on the economic theory of regulation due to shifting nicotine consumption towards traditional cigarettes, and negative pressure from market signaling of rising anti-smoking sentiment. I use the event study methodology to conduct the first empirical analysis of tobacco security returns during the regulatory period between July 2017–December 2019, focusing on a three-firm portfolio of tobacco stocks and employing the market model and calendar-time portfolio approaches. I find that the tobacco portfolio experiences negative average monthly abnormal return of up to 3.0 percentage points in response to e-cigarette regulatory activity, with an estimated cumulative abnormal return of -0.759 over the entire regulatory period. These results suggest that a revaluation effect occurred for tobacco companies and imply that the negative market signaling effect likely outweighed the producer benefits predicted by regulatory theory. I conclude that market expectations of future tobacco firm performance, and possibly also of future cigarette consumption, have been predominantly negative in response to federal e-cigarette regulation to date.