Measuring the Cost of Regulation: A Text-Based Approach

Abstract

We derive a measure of firm-level regulatory exposure from corporate earnings calls text and study its effects on growth, leverage, profitability, and equity returns. Higher regulatory exposure results in slower sales and asset growth, lower leverage, reduced profitability, but higher post-call equity returns. Most of these effects are mitigated for larger firms. We validate our measure by showing its explanatory power for cross-sectional stock returns during the 2016 Presidential election.