Measuring the Cost of Regulation : A Text-Based Approach

We derive a measure of firm-level regulatory costs from the text of corporate earnings calls. We use this measure to study the effect of regulation on companies' operating fundamentals, growth, leverage, and equity returns. We find that higher regulatory cost results in slower sales growth and lower leverage; both effects are mitigated for larger firms. A one-standard deviation increase in regulatory cost, as measured in the Q&A section of earnings calls, is associated with an increase in firms' equity returns of close to 3% per year. These findings suggest that regulatory risk is a major cost to firms, but large firms are able to manage that risk better