Measuring Firm Exposure to Government Agencies
65 Pages Posted: 28 Apr 2023 Last revised: 6 May 2024
Date Written: April 25, 2023
Abstract
We use textual analysis of mandatory accounting filings to develop firm-level, time-varying measures of exposure to individual government agencies including the Securities Exchange Commission (SEC) and Internal Revenue Service (IRS). The measures vary predictably across industries and with agency-specific events such as the Sarbanes Oxley Act at the SEC and budget cuts at the IRS. The measures positively relate to undisclosed agency investigations and financial statement downloads. Firms’ total exposure across government agencies negatively relates to their profitability, consistent with exposure to government agencies imposing net costs. Consistent with a causal interpretation of these results, the positive stock market reaction to the surprise election of Donald Trump, who promised to reduce the power of government agencies, positively varies with firms’ exposure to government agencies. As initial applications of our measures, we demonstrate that expanded SEC oversight increases firms’ stock liquidity and reduced IRS oversight decreases firms’ effective tax rates.
Keywords: Government agencies, disclosure, corporate profitability, corporate regulation, SOX, liquidity, IRS, tax planning
JEL Classification: D82, D83, M41
Suggested Citation: Suggested Citation