The Review of Asset Pricing Studies Vol. 14 No. 3 2024
Price of Regulations: Regulatory Costs and the Cross-section of Stock Returns
Abstract
Regulations introduce significant fixed costs and add to operating leverage. Fixed regulatory costs that contribute to operating leverage should generate a risk premium. To explore whether such a premium exists, we introduce a measure of “regulatory operating leverage” that reflects the importance of fixed regulatory costs in a firm’s cost structure. Regulatory operating leverage predicts stock returns in the cross-section, and a zero-cost high-low regulatory operating leverage strategy generates positive and significant risk-adjusted return. Finally, the impact of regulatory operating leverage on returns is due to the (systematic) risk contribution of fixed regulatory costs.
- DOI
- 10.1093/rapstu/raae001
- Volume
- 14
- Issue
- 3
- Pages
- 381-427
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref