Is the stock market sticker shocked? A study of market response to recent CAFE regulations in the US

In response to increasing environmental concerns, to improve energy security and to conserve energy use, the US government has proposed a new round of Corporate Average Fuel Economy (CAFE) standards. Many studies have focused on how the CAFE standard can be met by various automakers that have sales in the US market, and the costs and benefits of the companies meeting the standard. However, the stock markets' view on the impact of the standard on automakers' profitability is largely absent. We study the more recent episode of the CAFE regulation in an effort to try to detect the market response using the standard event study method. Our empirical findings suggest that while the stock market had some responses to the regulation, the large-scale and systematic reaction to the regulation is absent. In addition, the market response pattern to the regulation appears to be tied to the individual company's compliance condition if there is any significant response at all.