Ince, B.Özsöylev, Han Nazmi2024-02-262024-02-262024-012045-9920http://hdl.handle.net/10679/9223https://doi.org/10.1093/rapstu/raae001Regulations 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.engopenAccessAttribution 4.0 Internationalhttps://creativecommons.org/licenses/by/4.0/article00114323060000110.1093/rapstu/raae001G12G18G28