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Price of Regulations: Regulatory Costs and the Cross-section of Stock Returns

Author

Listed:
  • Baris Ince
  • Han Ozsoylev

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.

Suggested Citation

  • Baris Ince & Han Ozsoylev, 2024. "Price of Regulations: Regulatory Costs and the Cross-section of Stock Returns," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 14(3), pages 381-427.
    • Handle: RePEc:oup:rasset:v:14:y:2024:i:3:p:381-427.
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    File URL: http://hdl.handle.net/10.1093/rapstu/raae001
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    More about this item

    Keywords

    G12; G18; G28;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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