Measuring the Cost of Regulation: A Text-Based Approach
66 Pages Posted: 13 Apr 2020 Last revised: 22 May 2023
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Measuring the Cost of Regulation: A Text-Based Approach
Measuring the Cost of Regulation: A Text-Based Approach
Date Written: May 21, 2023
Abstract
We derive a measure of firm-level regulatory exposure from corporate earnings calls text and study its effects on growth, leverage, profitability, and equity returns. Higher regulatory exposure results in slower sales and asset growth, lower leverage, reduced profitability, but higher post-call equity returns, effects which are mitigated for larger firms. Our findings suggest that both risk and operating costs rise with increased regulation, but the risk impact is larger. Topical context of regulation is important for understanding the magnitude of outcomes. We validate our measure by showing its explanatory power for cross-sectional stock returns during the 2016 Presidential election.
Keywords: Regulation; Cost of Capital; Corporate Finance; Text Processing; NLP
JEL Classification: K23, G12, G38
Suggested Citation: Suggested Citation