Measuring Firm Exposure to Government Agencies

65 Pages Posted: 28 Apr 2023 Last revised: 6 May 2024

See all articles by Daphne M. Armstrong

Daphne M. Armstrong

University of North Carolina (UNC) at Chapel Hill

Stephen Glaeser

University of North Carolina (UNC) at Chapel Hill

Jeffrey L. Hoopes

University of North Carolina (UNC) at Chapel Hill - Accounting Area

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

Armstrong, Daphne and Glaeser, Stephen and Hoopes, Jeffrey L., Measuring Firm Exposure to Government Agencies (April 25, 2023). Journal of Accounting & Economics (JAE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=4428258 or http://dx.doi.org/10.2139/ssrn.4428258

Daphne Armstrong

University of North Carolina (UNC) at Chapel Hill ( email )

Chapel Hill, NC 27599
United States

Stephen Glaeser (Contact Author)

University of North Carolina (UNC) at Chapel Hill ( email )

102 Ridge Road
Chapel Hill, NC NC 27514
United States

Jeffrey L. Hoopes

University of North Carolina (UNC) at Chapel Hill - Accounting Area ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States

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

Paper statistics

Downloads
412
Abstract Views
1,678
Rank
133,760
PlumX Metrics