How Do Regulatory Costs Affect M&A Decisions and Outcomes?
42 Pages Posted: 5 Sep 2020
Date Written: July 21, 2020
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: Suggested Citation