How Do Regulatory Costs Affect M&A Decisions and Outcomes?

42 Pages Posted: 5 Sep 2020

See all articles by Baris Ince

Baris Ince

Bilkent University; Bilkent University - Management

Date Written: July 21, 2020

Abstract

Regulations introduce significant fixed costs, and add to operating leverage. “Regulatory operating leverage”, introduced by Ince and Ozsoylev (2020), quantifies the ratio of regulatory fixed costs over a firm’s cost structure. Regulatory operating leverage decreases a firm’s value through implied cost of equity and profitability channels. Due to economies of scale, large firms are less exposed to the negative value implications of regulatory operating leverage. This motivates large firms with high regulatory operating leverage to acquire other firms in the same industry. Moreover, it increases the likelihood of a small firm being target. Finally, regulatory operating leverage driven acquisitions are value increasing.

Keywords: Regulations, regulatory operating leverage, mergers and acquisitions, economies of scale, value increasing acquisitions

JEL Classification: G18, G34, L38

Suggested Citation

Ince, Baris, How Do Regulatory Costs Affect M&A Decisions and Outcomes? (July 21, 2020). Available at SSRN: https://ssrn.com/abstract=3657217 or http://dx.doi.org/10.2139/ssrn.3657217

Baris Ince (Contact Author)

Bilkent University ( email )

Bilkent Üniversitesi Lojman:105 Dai
Ankara, Ankara 06800
Turkey

Bilkent University - Management ( email )

06533 Bilkent, Ankara
Turkey

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