Internet Gaming Regulation: Valuation Concerns for the Industry

On October 13, 2006, President George W. Bush signed the Unlawful Internet GamblingEnforcementAct (UIGEA)of2006asanattachment to theSecurity andAccountability for Every Port Act of 2006. UIGEA is the first federal regulation specific to the online gaming industry. In this article, we examine the impact of UIGEA and its subsequent interpretation (through administrative rulemaking andDepartment of Justice actions) on the value of U.S. publicly traded firms in the gaming industry. We find that UIGEA is associated with an average increase in firm values in the gaming industry of approximately 2.86%. We also find that firms with a greater percentage of revenue from retail gaming gainedmore fromUIGEA. Finally, we document that the JusticeDepartment’s ruling onDecember 23, 2011, that not all gaming on the Internet is illegal, is associatedwith apositive3.55%return.Weconclude that allowed, regulated, controlledgrowthof Internet gaming is likely to provide significant value to the U.S. gaming industry. INTRODUCTION AND CONTEXT OF THE STUDY The Unfair Internet Gambling Enforcement Act (UIGEA) was signed into law by President GeorgeW. Bush as a conference report added to the Security and Accountability for Every Port Act (SAEPA) of 2006 (GovTrack.us, n.d.). The UIGEA was the first federal legislation aimed specifically at the regulation of Internet gaming. Interpretation of the law occurred through administrative rulemaking and Department of Justice (DOJ) actions over the next 6 years. Prior to the 2006 Act, many attempts to provide federal oversight of Internet gaming occurred. Between 1995 and thepassage ofUIGEA in2006, therewere 19bills submitted to either the House or the Senate that were intended to provide regulationof the online gaming industry (Table 1). In addition to the regulatory bills were two bills to study Internet gaming and one bill to express consensus. UIGEA prohibits the transfer of funds from a financial institution to an Internet gambling site, with exceptions for “fantasy” sports, online lotteries, and horse/harness racing. Both prior to and after the passage of the UIGEA, there was considerable diversity of opinion among lawmakers about the structure of optimal Internet gambling regulation. For example, various bills over time have been submitted by both Democrats and Republicans. Thirteen regulatory bills were submitted by Republicans, and six regulatory bills were submitted by Democrats prior to UIGEA. In addition, it was 11 years after the introduction of the first bill Address correspondence to Mark Johnson, Department of Finance, The Eli Broad College of Business, Michigan State University, East Lansing, MI 48824-1121, USA. Email: [email protected] The Journal of Hospitality Financial Management, 23:25–44, 2015 Copyright q Association of Hospitality Financial Management Educators ISSN: 1091-3211 print / 2152-2790 online DOI: 10.1080/10913211.2015.1038191 25 D ow nl oa de d by [ M ic hi ga n St at e U ni ve rs ity ] at 0 6: 50 2 8 Se pt em be r 20 17 TABLE 1. Legislative Introduction of Bills and Department of Justice Actions With Respect to Online Gaming.*** # Intro H or S* D or R** Act Name Date of Introduction 1 H497 R National Gambling Impact Study Commission Act 01/11/1995 2 S704 D National Gambling Impact Study Commission Act 04/06/1995 3 H3526 D Computer Gambling Prevention Act of 1996 05/23/1996 4 S474 R Internet Gambling Prohibition Act of 1997 03/19/1997 5 H2380 R Internet Gambling Prohibition Act of 1997 09/03/1997 6 H4350 R Internet Gambling Prohibition Act of 1998 07/29/1998 7 H4427 R Internet Gambling Prohibition Act of 1998 08/06/1999 8 S692 R Internet Gambling Prohibition Act of 1999 03/23/1999 9 H137 D Expressing the sense of Congress with regard to the recommendations of the National Gambling Impact Study Commission 06/18/1999 10 H3125 R Internet Gambling Prohibition Act of 2000 10/21/1999 11 H4419 R Unlawful Internet Gambling Funding Prohibition Act 05/10/2000 12 H5020 D Comprehensive Internet Gambling Prohibition Act of 2000 07/27/2000 13 H556 R Leach-LaFalce Internet Gambling Enforcement Act 02/12/2000 14 H2579 D Internet Gambling Payments Prohibition Act 07/20/2000 15 H3215 R Combating Illegal Gambling Reform and Modernization Act 11/01/2001 16 S3006 D Comprehensive Internet Gambling Prohibition Act of 2002 09/25/2002 17 H5760 D Internet Gambling Licensing and Regulation Commission Act 11/19/2002 18 H2143 R Unlawful Internet Gambling Funding Prohibition Act 01/07/2003 19 H1223 D Internet Gambling Licensing and Regulation Commission Act 03/12/2003 20 S627 R Internet Gambling Funding Prohibition Act 03/13/2003 21 H2143 R Unlawful Internet Gambling Funding Prohibition Act 05/19/2003 22 H4411 R Internet Gambling Prohibition and Enforcement Act* 11/18/2005 23 H4777 R Internet Gambling Prohibition Act 02/16/2006 24 H4954 R SAFE Port Act: Portion of the Internet Gambling Prohibition Act attached to this Act just before passage by House and Senate*** 03/14/2006 Safe Port Act introduced House 03/14/2006 Safe Port Act pass House 05/4/2006 Safe Port Act pass Senate 09/14/2006 UIGEA added to Safe Port Act as report accepted by House 09/29/2006 UIGEA added to Safe Port Act as report accepted by Senate 09/30/2006 Safe Port Act UIGEA signed by President Bush 10/13/2006 25 H5474 R Internet Gambling Study Commission Act 05/24/2006 26 H907 R Providing for consideration of the Bill (H.R. 4411) to prevent the use of certain payment instruments, credit cards, and fund transfers for unlawful Internet gambling, and for other purposes 07/10/2006 27 H2046 D Internet Gambling Regulation and Enforcement Act of 2007 04/26/2007 28 H2140 D Internet Gambling Study Act 05/03/2007 29 H2610 D Skill Game Protection Act 06/07/2007 30 H5523 D Internet Gambling Regulation and Tax Enforcement Act of 2008 03/04/2008 31 H6663 R Unlawful Internet Gambling Enforcement Clarification and Implementation Act of 2008 07/30/2008 32 S3616 D Internet Skill Game Licensing and Control Act of 2008 09/26/2008 33 Federal Reserve Board in consultation with Attorney General announces administrative rules associated with UIGEA 12/11/2008 34 H2267 D Internet Gambling Regulation, Consumer Protection, and Enforcement Act 05/06/2009 35 H2268 D Internet Gambling Regulation and Tax Enforcement Act of 2009 05/06/2009 36 S1597 D Internet Poker and Game of Skill Regulation, Consumer Protection, and Enforcement Act of 2009 08/06/2009 37 H4976 D Internet Gambling Regulation and Tax Enforcement Act of 2010 03/25/2010 38 H5599 D Wire Clarification Act of 2010 06/24/2010 39 H1174 R Internet Gambling Regulation, Consumer Protection, and Enforcement Act 03/17/2011 40 Justice Department indictes four firms; “Black Friday” 04/15/2011 41 H2230 D Internet Gambling Regulation and Tax Enforcement Act of 2011 06/16/2011 42 H2366 R Internet Gambling Prohibition, Poker Consumer Protection, and Strengthening UIGEA Act of 2011 06/24/2011 43 Justice Department Flip-Flops on the interpretation of The Wire Act 12/23/2011 (continued) 26 M. S. JOHNSON ET AL. D ow nl oa de d by [ M ic hi ga n St at e U ni ve rs ity ] at 0 6: 50 2 8 Se pt em be r 20 17