Regulatory Policy Enforcement and Corporate Performance

Abstract

We study the influence of regulatory agencies’ activities on firm performance. We eschew both firm-centric language about such activities as well as narrow focus on particular individual components of these activities. Instead, we build a broad measure of activity from the regulatory agency perspective. Using Exploratory Factor Analysis (EFA) we combine six agency-perspective variables, including actions, budget variables, and regulation-verbiage (from the Code of Federal Regulations) into a single annual Agency Activity Index (AAI). Constructing this measure separately for each of four major agencies (EPA, FDA, OSHA and SEC), we find stronger agency activity is associated with lower firm operating performance. Greater firm exposure to the agency strengthens the relationship. Firm-specific violations imposed (from Violation Tracker) are also associated with weaker firm performance. Finally, we conduct several event studies to underline our results. The passages of SOX and Dodd-Frank associate with worse CARs among more-exposed firms, while the recent Supreme Court “Chevron-doctrine” hearing that potentially limits agency influence associated with positive CARs among most of these same firms.