Regulatory Independence, Investment and Political Interference: Evidence from the European Union

This paper analyses and empirically investigates the impact of “modern” regulatory governance - i.e. the inception of Independent Regulatory Agencies (IRAs) - on the investment decisions of a large sample of European publicly traded regulated firms from 1994 to 2004. Because these firms provide essential services, governments are highly sensitive to regulatory decisions and outcomes. We therefore also investigate the impact of governments’ political influence, controlling for residual state ownership and market liberalization. To account for potential endogeneity of the key institutional variables, we draw our identification strategy from the political economy literature. Our results show that regulatory independence has a positive impact on firm investment. We also find that government interference generates instability and uncertainty in the regulatory framework, thus undermining investment incentives.