Impact of Regulations on Firm Value: Evidence from the 2016 U.S. Presidential Election
Journal of Financial and Quantitative Analysis, forthcoming
Using the 2016 U.S. presidential election result as a shock to the expectations about the future regulatory environment, I find that most regulated firms earned approximately 4% higher cumulative abnormal stock returns than least regulated firms during the first 10 trading days after the election. Exploring economic mechanisms, I find evidence consistent with the explanation that more regulations disproportionately harm high-growth firms and allow incumbent firms to extract rents through lower competition and political favoritism. Stock returns are also followed by a shift in firm fundamentals over the 3 years after 2016, consistent with the economic mechanisms.
Scalable Demand and Markups
Enghin Atalay et al.
NBER Working Paper, May 2023
We study changes in markups across 72 product markets from 2006 to 2018. A growing literature has documented a rise in markups over time using a production function approach; we instead employ the standard microeconomic method, which is to estimate demand and then invert firms’ first-order pricing conditions to infer their markups. To make the method scalable, we propose estimating nested logit demand models, using household panel data to automate the assignment of products to nests. Our results indicate an overall upward trend in markups between 2006 and 2018, with considerable heterogeneity across and within product markets. We find that changes in firms’ marginal costs and households’ price sensitivity are the primary drivers of markup increases, with changes in firm ownership playing a much smaller role.
Competition and Reputation in an Online Marketplace: Evidence from Airbnb
Management Science, forthcoming
This paper studies how competition affects the role of reputation in encouraging sellers to exert effort. More competition disciplines sellers, but at the same time, it erodes reputational premia. This paper identifies whether one effect dominates the other using data from Airbnb. I exploit the introduction of a short-term rental regulation effective in San Francisco in 2017 that halved the number of short-term listings on the platform. I focus on hosts who are present on the platform before and after the regulation, and I identify a negative causal effect of the number of competitors on ratings about hosts’ effort. I extend this result with two other measures of effort: hosts’ response rate and response time. I confirm that hosts exert less effort when the number of competitors increases. The rate of responses within 24 hours decreases, and response time increases.
Rank Has Its Privileges: Explaining Why Laboratory Safety Is a Persistent Challenge
Gokce Basbug, Ayn Cavicchi & Susan Silbey
Journal of Business Ethics, May 2023, Pages 571–587
Environmental, health, and safety management systems have become common in research settings to improve laboratory safety through systematic observation and self-regulation. However, there is scant empirical evidence assessing whether these surveillance and inspection systems meet their intended objectives. Using data from safety inspections in research laboratories at a large university, we investigate whether conducting inspections, and recording and reporting findings back to the formally responsible actors (i.e., principal investigator scientists) lead to the improvement of regulatory compliance. Our analyses identify a population of well-funded, high-status, tenured researchers whose non-compliant practices persist. Our interviews with environmental, health, and safety personnel suggest that higher-status actors disengage from the regulatory system, the compliance officers, and the system’s feedback process by their variable recognition and acknowledgment of relevant regulations, attention to the inspection reports, and responses to the feedback concerning repair of the unsafe situation. This study extends previous literature on regulatory compliance by providing evidence for the role of power and status in explaining actor-level non-compliant behavior.
Caught in the Revolving Door: Firm-Government Employee Mobility as a Fleeting Regulatory Advantage
Ivana Katic & Jerry Kim
Organization Science, forthcoming
How does the exchange of employees between regulatory agencies and regulated firms (i.e., the firm-government revolving door) affect firm regulatory outcomes? Existing work has mostly found a positive impact of revolving door hiring on firm outcomes, but it has overlooked potential limitations of this corporate political activity (CPA) tactic. We argue that the advantages firms can gain from hiring former regulators are bound by the timing of revolving door employment relative to the regulatory process. Within the context of agribiotechnology and its main regulator, the U.S. Department of Agriculture, we study regulators who move to in-house and contract lobbying positions (i.e., exit revolving door). We find that firms receive better regulatory outcomes (i.e., faster regulatory approval for new crops) only prior to the regulators’ move to in-house lobbying, consistent with the regulatory capture perspective. Moreover, this revolving door was only valuable in the time period immediately before the mobility event. Additionally, contrary to the belief that former regulators provide firms with expertise and social capital as lobbyists, we find that firms did not gain any advantage after regulators became lobbyists. Taken together, our results suggest that revolving doors can be an effective business political mobilization strategy, albeit one that has limited success in shaping firm government outcomes, much like other types of CPA.
Measuring Firm Exposure to Government Agencies
Daphne Armstrong, Stephen Glaeser & Jeffrey Hoopes
University of North Carolina Working Paper, April 2023
We use textual analysis of mandatory accounting filings to develop firm-level, time-varying measures of exposure to individual government agencies. The measures vary predictably across industries and with broad regulatory interventions that expanded the scope and power of different government agencies, but also include substantial firm-specific, time-varying components. These components positively relate to undisclosed agency investigations and to financial statement downloads. Consistent with exposure to government agencies imposing net costs on firms, firms’ overall exposure negatively relates to their profitability and positively relates to their future returns. Consistent with a causal interpretation of these results, we find that the positive stock market reaction to the surprise election of Donald Trump, who promised to reduce the power and scope of government agencies, positively varies with firms’ ex ante exposure to government agencies. The negative relation between exposure to government agencies and profitability is particularly significant for certain agencies, highlighting the benefits of an agency-specific measure. Highlighting the benefits of a firm-year measure, we find that firms’ profitability positively relates to their competitors’ exposure to government agencies, consistent with exposure to government agencies reallocating resources within industries.
Economic freedom and one-way truck rental prices: An empirical note
Alexander Cardazzi & Robert Lawson
American Journal of Economics and Sociology, forthcoming
This study examines the one-way truck rental prices for 378 cities. There are large price differentials in one-way rental prices between city pairs. The pull of people toward higher economic freedom locales and push away from lower economic freedom locales is found to be an important determinant of the city-pair price differentials.
Density of Large Urban Areas in the U.S. and Barriers to Urban Expansion, 1950-2020
Indiana University Working Paper, May 2023
Housing unit densities are examined in 56 large urban areas in the United States defined in a consistent manner from 1950 to 2020. The mean density declined slightly over this period but this masks tremendous variation across the urban areas. Some of the most dense urban areas at the start experienced large drops, but substantial numbers of areas had increases in density, some large. Densities across regions changed dramatically, with mean densities for urban areas in the West rising from only slightly above the South to the highest by 2020, well above the Northeast and the Midwest which were highest in 1950. Density and density change are related to the size of the urban area (number of housing units), and change is also related to change in size and (negatively) to density at the start. The effect of potential barriers to expansion on density is investigated, with strong, significant effects of water and mountains on urban area densities.
Constraining Growth: Advance Layoff Notice and Corporate Innovation
Scott Guernsey, Gunchang Kim & Yupeng Lin
University of Tennessee Working Paper, April 2023
The recent wave of tech sector layoffs has highlighted concerns about worker protection from abrupt job loss. This paper introduces a new quasi-natural experiment, the state Worker Adjustment and Retraining Notification Act, which reflects these concerns by mandating advance notice to displaced employees. We examine how exposure to the Act changes firms’ innovation activities, finding decreases in R&D expenditures, patent grants, and citations, especially among firms in industries less suited for automation and with longer-term planning horizons. Establishment-level evidence reinforces these findings, indicating slower employment growth, fewer establishment openings and acquisitions, and more small-(large-)establishment closures (divestitures). We conclude that worker protection from sudden displacement creates operational inflexibility that hinders innovation and growth.
Empirical Model of Dynamic Merger Enforcement -- Choosing Ownership Caps in U.S. Radio
Management Science, forthcoming
The paper introduces a method to conduct a forward-looking antitrust review of horizontal mergers. The method utilizes a dynamic oligopoly model in which mergers, entry/exit, and product repositioning are endogenous. The model provides long-run industry trajectories with and without the merger under review, enabling the regulator to obtain dynamically robust welfare comparisons. The paper demonstrates the framework’s application to regulate the U.S. radio broadcasting industry. In particular, it investigates the long-run efficacy of two commonly used merger heuristics: radio station ownership caps (see the Telecom Act of 1996) and static merger simulations. The paper finds that raising the ownership cap results in higher total welfare and demonstrates varying long-run effectiveness of merger simulations.
Are mergers and acquisitions beneficial to consumers? Evidence from the property-liability insurance industry
Financial Review, forthcoming
We examine price changes associated with mergers and acquisitions (M&As) in the U.S. property-liability insurance industry. We classify M&As into intrastate M&As, where the acquirer and the target previously operated in the same local market, and interstate M&As, where the acquirer and the target operated in different local markets. We show that insurance prices of acquiring firms decrease following interstate M&As, whereas there is no significant effect of M&As on price changes in intrastate consolidation. Using an interaction term between interstate M&A indicators and acquirers’ efficiency, we find evidence to suggest that acquirers’ efficiency can explain the price decrease in interstate M&As. It appears that acquirers’ efficiency can be passed on to consumers, and interstate M&As have a beneficial effect on consumers in the form of reduced prices.
The convergence dynamics of economic freedom across U.S. states
James Payne et al.
Southern Economic Journal, April 2023, Pages 1216-1241
This study tests for convergence in economic freedom across the 50 U.S. states from 1981 to 2019. In particular, we test for stochastic convergence in overall economic freedom using unit root tests that account for structural breaks and bounded processes, two sources of parameter instability. We find limited evidence of stochastic convergence. Further analysis of relative (club) convergence and weak σ-convergence rejects the presence of overall convergence in the panel of the U.S. states, but the emergence of two convergence clubs with respect to state-level economic freedom. The logit analysis of the determinants of the convergence clubs reveals that more prosperous states and states with a higher initial level of economic freedom have a higher probability of being in the club with more economic freedom. However, more racially diverse states have a lower probability of being in the club with more economic freedom.