星空传媒

How do investors and publicly traded firms in the fledgling cryptocurrency market react when government officials or regulatory agencies propose new protocols, procedures and guidelines designed to monitor the emerging digital assets industry?

That鈥檚 what two professors in the FORVIS School of Accountancy in the Western Carolina University College of Business set out to determine through their examination of changes in market capitalization and stock price volatility as a measurement of investors鈥� reaction to regulatory efforts.

星空传媒鈥檚 Joseph Hashem, assistant professor of accountancy, and Marco Lam, professor of accountancy, focused their study on then-President Joseph Biden鈥檚 Executive Order 14067, titled 鈥淓nsuring Responsible Development of Digital Assets鈥� and issued March 9, 2022. That executive order, which has since been rescinded by President Donald Trump, was designed to clarify the U.S. government鈥檚 strategy for digital assets, including cryptocurrencies.

For their research, Hashem and Lam also centered on the Securities and Exchange Commission staff accounting bulletin No. 121 from March 24, 2022. That staff bulletin, also rescinded by the current administration, was designed to provide guidance on safeguarding digital assets and to draw attention to the increased technological, legal and regulatory risks associated with cryptocurrency compared to more traditional financial assets.

The results of the study are the subject of a paper recently accepted for publication by Managerial Finance, an international journal with a focus on all areas of financial research, in an article titled "Regulation in the Realm of Cryptocurrency Investment: An Examination of Equity Investors鈥� Behavior.鈥�

In their study, Hashem and Lam examined the impact of regulatory news announcements on both the cumulative abnormal returns and unique volatility of firms that participate in the cryptocurrency market.

Their findings? It鈥檚 a mixed bag, Hashem said.

鈥淲e found that, depending on the context, regulatory news announcements related to cryptocurrencies can have either favorable or unfavorable impacts on the market capitalization and risk perception of firms that are highly involved in the cryptocurrency industry,鈥� he said.

On the one hand, the long-term buy-and-hold atypical returns associated with both events indicate a positive reaction by investors; on the other hand, the pre- and post-event windows show mixed results in the short term, Hashem said.

The researchers also examined how investment firms often use behaviors, actions and reactions to communicate 鈥� sometimes almost subliminally 鈥� their positions on cryptocurrency to investors and potential clients, a phenomenon known as 鈥渟ignaling.鈥�

鈥淎 number of firms may invest in cryptocurrency because this relates to their business model. However, other firms invest to signal that they are trendy,鈥� Hashem said. 鈥淲e investigate whether investors feel the added value of cryptocurrency investment is constrained by regulations or if such regulations add a layer of legitimacy to the cryptocurrency domain.鈥�

The faculty members said they were interested in seeing how companies that are involved in 鈥渢his novel, innovative, risky and high-growth domain would be affected by news of regulation.鈥�

鈥淢uch has been done to investigate the direct impact of such regulations on cryptocurrencies, but we had not seen how firms with strong associations to the domain would be affected,鈥� Hashem said.

鈥淲hat really made the story interesting was not knowing exactly how things could turn out,鈥� he said. 鈥淲as it seen in a positive light that cryptocurrencies are so legitimate now that regulators want to 'rein them in?' Or is this just another example of government restricting peoples' financial freedom?鈥�

For the most part, at this time cryptocurrencies continue to be regulated in line with other more traditional financial instruments, the professors said.

鈥淕oing forward, we expect more regulations specific to the cryptocurrencies,鈥� Hashem said. 鈥淲e provide foundational evidence on whether cryptocurrency investment adds net value to a publicly traded firm. Furthermore, our findings should be of interest to regulatory bodies and lawmakers who are interested in better understanding the market impact of their comments and decisions.鈥�

While some experts suggest that a hands-off regulatory approach is best suited for the emerging domain of cryptocurrency, Hashem and Lam say they are more inclined to stress the value of regulators introducing the policies that they deem appropriate for this new realm.

They also say the rapidly changing world of cryptocurrencies is ripe for additional study, and that their own research is limited by a rather small sample size of 20 firms examined and a constricted time frame studied. The digital asset investment market would also benefit from a more in-depth study that includes firms from around the world and not just ones centered in the United States, they say.