Regulatory Similarity
Journal of Law and Economics, forthcoming (2023)
83 Pages Posted: 7 Jan 2021 Last revised: 25 Oct 2023
Date Written: November 14, 2020
Abstract
We show that regulation reveals unexpected yet economically important links between companies. Using the full text of the Federal Register, the official publication of the U.S. government, we develop a similarity score which compares the regulatory exposure of each pair of companies. Intuitively, a higher score means that the two firms comply with similar regulations and answer to the same regulatory agencies. Regulatory similarity transcends industry boundaries, geographic proximity, and product markets, and existing similarity measures account for only one-quarter of the variation in regulatory similarity. Moreover, the fundamentals of firms with high regulatory similarity co-move along key corporate outcomes such as the costs of compliance, profitability, and capital investment. Using a supervised machine-learning algorithm, we decompose the similarity into 12 topics and find that it is driven by regulatory issues related to finance and labor. Each firm has a unique set of peers for each topic, and they all lobby the government for similar topics. Combined, our results uncover an economically important commonality between companies centered around regulatory issues.
Keywords: economics of regulation, networks, capital investment, lobbying, machine-learning
JEL Classification: G1, G3, K2, L5
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