Wednesday, 18 March 2020

Costs of regulation

There is a new NBER working paper out on Measuring the Cost of Regulation: A Text-Based Approach by Charles W. Calomiris, Harry Mamaysky and Ruoke Yang.

The abstract reads,
We derive a measure of firm-level regulatory costs from the text of corporate earnings calls. We then use this measure to study the effect of regulation on companies’ operating fundamentals and cost of capital. We find that higher regulatory cost results in slower sales growth, an effect which is mitigated for large firms. Furthermore, we find a one-standard deviation increase in our preferred measure of regulatory cost is associated with an increase in firms’ cost of capital of close to 3% per year. These findings suggest that regulatory risk is a major cost to firms, but the largest firms are able to manage that risk better.
One obvious point here is that regulation is costly to firms. But it is less costly to large firms than small, this has implications for competition policy. Large firms may support regulation as a way of increasing the costs of small firms relatively more than for large firms. This means that large firms can use regulation as a way of forcing new, innovative small firms out of the market, and thus reduce competition.

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