Regulatory Burden and M&A Activity

Abstract

Using a novel measure of exposure to federal regulations, we study the impact of firm-level regulatory burden on M&A activity. Firms respond to increased regulation by engaging in more M&A activity, on average, but the effect hinges crucially on firm size. Large firms increase acquisition investment and earn higher announcement returns. In contrast, small firms become more likely to sell out, particularly to strategic acquirers that have a high degree of regulatory overlap. Overall, our findings uncover an unintended consequence of federal regulation that advantages large firms and influences the composition of U.S. industries.

Keywords: Mergers, Acquisitions, Corporate regulation

JEL Classification: G18, G34, G38, K23, L25, L51, M48