Price of regulations: Regulatory costs and the cross-section of stock returns
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Type :
Article
Publication Status :
Published online
Access :
openAccess
Attribution 4.0 International
https://creativecommons.org/licenses/by/4.0/
Attribution 4.0 International
https://creativecommons.org/licenses/by/4.0/
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.
Source :
The Review of Asset Pricing Studies
Date :
2024-01
Publisher :
Oxford University Press
URI
http://hdl.handle.net/10679/9223https://academic.oup.com/raps/advance-article/doi/10.1093/rapstu/raae001/7515258
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