Journal of Banking and Finance 9 (1985) 585-595. North-Holland A NOTE ON DEPOSIT RATE DEREGULATION, SUPER NOWS, AND BANK SECURITY RETURNS Donald R. FRASER, R. Malcolm RICHARDS and Richard H. FOSBERG* Texas A&M University, College Station, TX 77843, USA Received September 1984, final version received May 1985 This paper empirically investigates the effects on the weekly returns of almost 100 banking organizations of the December 1982 authorization of Super NOWs. Examination of excess returns around the announcement date suggests that the announcement of the Super NOWs had a statistically significant (and negative) effect and that the impact differed significantly by type of bank. While returns for money center banks were generally unaffected, excess returns for regional retail banks were highly significant. 1. Introduction The effects of regulation (and deregulation) on the pattern of security returns has been of increasing interest to financial economists in recent years. The relationship that should exist between regulation and security returns can be described by the efficient markets hypothesis (EMH). The EMH implies that unanticipated changes in regulation will result in an instan- taneous adjustment in security prices for those firms subject to the regulation, and that these price changes should be viewed as unbiased estimates of the present value of the changes in future cash flows (at the firms subject to the regulation). In other words, if new regulations contain new information that has a bearing on security values, this new information is immediately impounded in security prices. The effects of regulation have been examined empirically in a number of studies. For example, Peltzman (1968) investigated the effects of restrictions on entry in the banking industry, while Dann and James (1982), James (1983), and Smirlock (1984) have examined the effects of deposit rate ceilings on the market values of commercial banks and thrift institutions. [The methodology and the results of many previous studies of the effects of regulation are summarized by Schwert (1981).] The present study extends previous research on the effects of regulation and deregulation. This study examines the impact of one major change in the *We are indebted to two anonymous reviewers for helpful comments on earlier drafts of the paper. Of course, any remaining errors are the sole responsibility of the authors. 0378--4266/85/$3.30 O 1985, Elsevier Science Publishers B.V. (North-Holland)