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Measuring the Cost of Regulation: A Text-Based Approach

Charles W. Calomiris, Harry Mamaysky, Ruoke Yang

NBER Working Paper No. 26856
Issued in March 2020
NBER Program(s):Corporate Finance, Economic Fluctuations and Growth, Industrial Organization, Law and Economics, Political Economy

We derive a measure of firm-level regulatory costs from the text of corporate earnings calls. We then use this measure to study the effect of regulation on companies’ operating fundamentals and cost of capital. We find that higher regulatory cost results in slower sales growth, an effect which is mitigated for large firms. Furthermore, we find a one-standard deviation increase in our preferred measure of regulatory cost is associated with an increase in firms’ cost of capital of close to 3% per year. These findings suggest that regulatory risk is a major cost to firms, but the largest firms are able to manage that risk better.

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Document Object Identifier (DOI): 10.3386/w26856

 
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