European Union's AI Act: Protecting the Public at the Cost of Innovation?

<p><span>The European Union (EU) adopted the Artificial Intelligence Act (AI Act) in 2024, establishing the world’s first comprehensive AI regulation. This study examines market reactions to the first three major events leading to the Act, as well as to events associated with stricter (cost-increasing) versus more lenient (cost-decreasing) regulatory provisions. We also analyze how a country’s AI investment and firm-specific factors moderate these reactions. We find negative EU-wide market reactions to initial and cost-increasing events, particularly in jurisdictions with high AI investment and industries likely to use high-risk AI systems. Larger firms experience more favorable abnormal returns, suggesting smaller firms may bear a disproportionate regulatory burden. In addition, R&amp;D-intensive firms exhibit more negative reactions, especially in jurisdictions with high AI investment and high-risk industries. Overall, the findings suggest investors anticipate higher compliance costs and slower innovation under the AI Act, potentially weakening the EU’s global AI competitiveness.</span></p> <p><span>&nbsp;</span></p>