Follow the Pipeline: Anticipatory Effects of Proposed Regulations

78 Pages Posted: 17 Feb 2023 Last revised: 20 May 2024

See all articles by Suzanne Chang

Suzanne Chang

Tulane University - A.B. Freeman School of Business

Joseph Kalmenovitz

University of Rochester - Simon Business School

Alejandro Lopez-Lira

University of Florida - Department of Finance, Insurance and Real Estate

Date Written: February 15, 2023

Abstract

We provide the first large-sample evidence of substantial anticipatory effects: firms are affected by proposed rules long before those are finalized. We construct a new data set that tracks the timeline of each of the 43,000 rule proposals developed by all federal agencies since 1995. The average proposal spends more than two years in the rulemaking pipeline and only two-thirds convert into a final rule. Training a machine-learning algorithm on the regulatory text and corporate disclosure files, we derive a firm-level measure of exposure to the regulatory pipeline: the amount of rule proposals which are relevant to the firm. We find that firms with greater exposure increase overhead costs, reduce capital investments, and report lower profits. The effects are independent of the current regulatory burden and political risk. They increase with the expected burden of the proposals and when the proposals are unprecedented, for instance, when agencies develop rules outside of their core expertise. Finally, we calibrate a latent factor model of stock returns with our new firm-specific measure to identify systematically important regulatory topics, such as Securities, Natural Resources, and Environment. Our results are the first to document anticipatory effects based on the entire body of potential federal regulations.

Keywords: machine learning, economics of regulation, rulemaking, anticipatory effects

JEL Classification: E22, G18, G28, G31

Suggested Citation

Chang, Suzanne and Kalmenovitz, Joseph and Lopez-Lira, Alejandro, Follow the Pipeline: Anticipatory Effects of Proposed Regulations (February 15, 2023). Available at SSRN: https://ssrn.com/abstract=4360231 or http://dx.doi.org/10.2139/ssrn.4360231

Suzanne Chang

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

Joseph Kalmenovitz (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

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

Alejandro Lopez-Lira

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

HOME PAGE: http://alejandrolopezlira.site/

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
556
Abstract Views
2,352
Rank
93,532
PlumX Metrics