A market based evaluation of the election versus appointment of regulatory commissioners

This paper examines the elected versus appointed commissioner dichotomy from a market value perspective. Previous empirical analysis tends to concentrate on rates rather than examining the impact on shareholders' wealth. We examine life insurance industry data during the period surrounding the passage of California's Proposition 103. The primary impact of the referendum on life insurers is to change the method of commissioner selection from appointment to popular vote. We find that this change significantly reduced the value of life insurers doing business in California. This result is consistent with the recent findings of Boyes and McDowell (1989) and Smartt (1994) using alternative evaluation procedures for firms in other regulated industries. This implies that the change to a popular election of commissioners either increases the level of risk and/or decreases the expected cash flows of regulated firms.