Regulatory Similarity

Journal of Law and Economics, forthcoming (2023)

83 Pages Posted: 7 Jan 2021 Last revised: 25 Oct 2023

See all articles by Joseph Kalmenovitz

Joseph Kalmenovitz

University of Rochester - Simon Business School

Jason (Pang-Li) Chen

Harbert College of Business, Auburn University

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

Suggested Citation

Kalmenovitz, Joseph and Chen, Jason (Pang-Li), Regulatory Similarity (November 14, 2020). Journal of Law and Economics, forthcoming (2023), Available at SSRN: https://ssrn.com/abstract=3730721 or http://dx.doi.org/10.2139/ssrn.3730721

Joseph Kalmenovitz (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

HOME PAGE: http://sites.google.com/view/jkalmenovitz

Jason (Pang-Li) Chen

Harbert College of Business, Auburn University ( email )

Auburn, AL 36849
United States

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