Regulatory Policy Enforcement and Corporate Performance

Dain C. Donelson; Jon A. Garfinkel; Sepehr Roudini

doi:10.2139/ssrn.4388696

Government influence on private industry is thought to be substantial. However, the channels of that influence and even the consistency of an effect, are unclear. Prior studies primarily approach the question of this influence based on legislation or political parties, and this has led to decidedly mixed results. We approach the problem differently. We recognize that until very recently, the literature largely ignored the reality that much political work is done by executive agencies. Moreover, the recent literature that does examine regulatory agencies focuses exclusively on firm responses. In contrast, we build a broad measure of policy enforcement from the regulatory agency perspective. That is, we construct six agency-perspective variables, including actions, budget variables, and regulation-verbiage (from the Code of Federal Regulations). We combine the six measures in exploratory factor analysis to obtain a latent Enforcement Index variable. Applying this measure to firms exposed to four major agencies (EPA, FDA, OSHA and SEC), we find stronger regulatory enforcement is associated with lower firm operating performance. We also (logically) find that greater firm exposure to the agency strengthens the relationship. There is significant cross-agency heterogeneity in enforcement’s influence. We document that the channel most likely driving the relationship is a cost channel, as opposed to an asset-(in)efficiency channel. We also highlight the importance of studying six agency variables, by showing heterogeneity across them in the influence on firm performance. Our results are largely orthogonal to recent findings that focus strictly on CFR-related firm-expressed-concerns. At a more granular enforcement level, we also find that firm-specific violations imposed (from Violation Tracker) are associated with weaker firm performance. We conclude that executive-branch enforcement is an important contributor to the cost of regulation, regardless of firm attention to it as expressed through their own disclosures.

Regulatory Policy Enforcement and Corporate Performance

Files and links (1)

Abstract

Details

Metrics