Measuring the Cost of Regulation: A Text-Based Approach

We derive a measure of firm-level regulatory costs from the text of corporate earnings calls. We then use this measure to study the effect of regulation on companies’ operating fundamentals and cost of capital. We find that higher regulatory cost results in slower sales growth, an effect which is mitigated for large firms. Furthermore, we find a one-standard deviation increase in our preferred measure of regulatory cost is associated with an increase in firms’ cost of capital of close to 3% per year. These findings suggest that regulatory risk is a major cost to firms, but the largest firms are able to manage that risk better.

That is the abstract of a new NBER paper by Charles W. Calomiris, Harry Mamaysky, Ruoke Yang, a piece written in pre-Covid-19 times.  It has never been more relevant, except that the estimates for regulatory costs turn out to be far too low (no criticism of the authors is intended here).  To repeat my earlier point, America’s regulatory state is failing us.


Based on my experience the papers I have seen greatly underestimate the cost of regulation. It has been a significant burden to the startups I have been involved with. It is really discouraging to startups when the company is spending more on lawyers and compliance than building the business.

@Glenn - why not do as the Big Boys do, and that's do something first and let the lawsuits follow later? Uber, Tesla, Amway, Herbalife, just off the top of my head seem to operate this way. Trying to cross your i's and dot all your t's (sic) is a kludge recipe for disaster. In a sense, Theranos had it right, IMO, but they were simply tripped up by an overzealous WSJ reporter (who knows what breakthroughs Theranos would have had today, in Covid-19 times? They had interesting technology from what I saw in public: " Theranos claimed its technology was revolutionary and that its tests required only about 1/100 to 1/1,000 of the amount of blood that would ordinarily be needed and cost far less than existing tests." - imagine having a Covid-19 antibody test that can be done with a pinprick, for example).

Not that any lawyer who values their job would tell you this, not even a failed lawyer. Are you listening to lawyers Glenn? Maybe you need to listen to business people instead. Let the lawyers write the memos to file but relying on a lawyer to run a firm is like relying on Chuck Prince, Esq. to run a banking conglomerate, how that work out? Granted, sometimes this 'shoot from the hip strategy' fails, e.g., Theranos.

In Greece there's a saying: "Everything is forbidden (by law) and everything is permitted (in practice)". Time to start applying the same principle in the USA? (then again, in Greece there's a 'safety valve' in that due to a weak state, you can bribe people if things get hairy and usually escape some draconian penalty; not possible in the USA).

Bonus trivia: I'm a small businessman, and I don't follow any law but natural law: if it makes money and doesn't kill or bodily harm anybody, I do it. I haven't gone to jail, yet.

Theranos is not something that should ever be viewed aspirationally. See link:

If the system manages to lock her up Elizabeth Holmes will have earned her jail cell in perpetuity. There are very few people in this world who qualify for the title evil... she is one of them.

Theranos inventing the cure for COVID? Ray is a comedian.

Overzealous reporters don't cause failed business. Failed leadership does.

"Everything is forbidden (by law) and everything is permitted (in practice)"

I had a college professor back in the 1970's who said build whatever you want to, the zoning people will never make to demolish it. He wa talking about additions to homes, like garage apartments, 2nd story apartments, stuff like that not factories/office/retail.

@Floccina - the college professor is 100% correct, under US law, *except* in the state of New York (I failed real property law in law school, but I do recall this). In New York state, the state can, and has, forced owners who built structures not in line with zoning law to tear the offending structures down, rather than, as in nearly all other states I'm aware of, to fine the owner.

Ya IDK how to over state this one

For the record saying Theranos did X well where X has a positive value on any spectrum is kind of akin to an assault on the integrity of the whole field of chemistry and physics and medicine it's like an assault on the foundations of civilization... I have like feelings about this one... /sorry if I'm coming off harsh it's just so clear cut on that one... /sigh

@An Engineer- thanks I read all the links, and they were fun, this commentator captures the essence: "TimmyG says: 15 October, 2015 at 12:13 pm Nothing about this company makes sense. $9B valuation but extremely slow commercial roll-out? A 2-log advance in analytical chemistry capabilities but NO validation in peer-reviewed journals? A CSO who commits suicide, in spite of “revolutionary” opportunity to improve human health? BoD with Henry Kissinger, Sam Nunn & George Schultz? (Great if you’re looking to sign an arms treaty, bad if you’re testing for glucose levels."

But see: Google Patents says Theranos had 353 patents (pending or issued), are none of them any good? E.g., this one: US9500639B2 United States "Low-volume coagulation assay. Abstract: Compositions and methods for measuring coagulation parameters using very small volumes of blood are provided. Advantageously, the methods described herein can be performed from a single drop of blood (about 20 μL) while generally leaving enough sample to perform other measurements, optionally in a multiplexed format. The methods and devices do not require a skilled operator and can be performed at the point of service, which can be an important feature for managing blood coagulation disorders and treatments thereof" Inventors: Mark Dayel, Samartha Anekal, Paul Patel, Ian Gibbons, Elizabeth Holmes <--last putative inventor looks gratuitous but not uncommon in patents

In short, with enough money, *might* Theranos been onto something, if given enough time? Putting aside the fraud, the bullying culture, the hot chick CEO (she's a Washington DC native), and the fact the blood sampling device did not have the requisite accuracy? Probably not. But they were bold, give them that much.

Interesting that the Theranos criminal lawsuit is due this summer,and note the Theranos defense, which looks like a troll comment I would write. Also how your lawyer is indeed your best friend, as long as they are PAID, boy. (Wikipedia): The case is U.S. v. Holmes, 18-cr-00258, United States District Court for the Northern District of California and it is set to begin on July 28, 2020.[68][69] They could face up to 20 years in prison if convicted.[70][71]
In June 2019, Bloomberg News reported Holmes and Balwani are looking into a possible defense strategy of blaming the media for the downfall of Theranos. The lawyers are looking into whether journalist John Carreyrou's reporting caused undue influence upon government regulatory agencies in order to write a sensational story for The Wall Street Journal.[68]
In October 2019, The Mercury News reported that Cooley LLP, Holmes' legal team in a class-action civil case, requested that the court allow them to stop representing her, stating that she had not paid them in a year for services, and that "given Ms. Holmes's current financial situation, Cooley has no expectation that Ms. Holmes will ever pay it for its services as her counsel.".[72] In November 2019, The Recorder reported that Senior District Judge H. Russel Holland, who was overseeing the civil case, indicated that he would allow Cooley to withdraw.[73]

Odd that Elon Musk is not hindered by regulation in creating and growing startups.

Maybe because he starts by spending all his own money and effort before trying to get and pocket money from workers trying to get rich without taking risk or working. He's able to convince others who earned their own money to give him money to pay workers to build capital faster than his own labor can.

The two biggest hindrances for people like you and others hammering on regulations are:

You must pay owners the price they want, including infinity in some cases, to get their property. Eg, property ownership is a big regulation standing in the way of fast development for people like Trump and his ilk.

Second, the 13th amendment means you must pay workers to work and no kill or maim them for profit.

Related to both, you can't kill or maim the owners of property, or destroy their property to increase profits.

All the other regulations flow from those two primary regulations due to the long history of getting justice for victims against the people who want fast growing profits.

Your heroes, Elizabeth Holmes and Bernie Maddoff are headed to or in jail, not so much for what they did to screw others to get "high growth" thus high profits from inflated stock prices, but for violating laws on paperwork.

The redess of harms is still in civil courts with years of tort proceedings trying to get cash from stone to return to those who gave them money based on lies.

By the way, are you opposed to the concept of intellectual property rights, which is clearly a regulatory method of blocking innovation and growth to kill startups?

Damned straight. Holmes and Madoff were frauds. They claimed that they could provide a good return to lure investment money, but they lied. I agree with you that it is rather sad that having regulations against flat out lying is considered government overreach nowadays.

@mulp, @ the 99% - you'll never get into the 1% like I am unless you learn to think critically. Madoff ran a Ponzi scheme. Likely his "victims" knew it, and were greedy (not all, but many). The conservator, Picard, tasked with recovering Madoff money for victims got an incredible 66% of the money back, making the Madoff fraud no worse for the victims than a bad bear market. Most of them were already rich so I'm sure they don't mind.

As for Holmes? Well, that's a tough one, but as a failed law school student I can tell you if she gets a sympathetic judge (not sure if she's going for a jury but as a young rich white woman she may or may not get a sympathetic jury, though she's now broke), and with her pretty looks, and the fact she'll claim she was only relying on scientists to advise her, there's a 10% chance she'll get off with a slap on the wrist.

^^^ the above kind of thinking gets you into the 1%. That and inheriting money.

How much of lawyers are actually compliance versus governance? A lot of startups are funded not by a founder's personal fortune but by investors who swap cash for ownership. Since the investors want to have as much ownership as possible, and the ability to take over from the founder if things go badly, and the founder wants to give up no control ever.....that seems like a recipe for a lot of billable lawyer hours.

Starting a business by swiping your credit card or even just a bank loan? I suspect a lot less lawyer time required.

Spineless managers are failing us by delegating decisions to their attorneys. Some doctors seem to be stepping up to provide leadership but the administrators seem to be covering their asses first.

The answer is not to change the laws, it's for people to stop asking for permission to do the right thing. There will be time to beg for forgiveness later. The "regulatory state" will be needed again soon, like it or not.

Why do you think that these bad decisions that cost money and lives aren't the norm? Why would you think that the time it takes to get a decision from these regulators don't cost enormous amounts of resources and even lives in normal times? How much that would measurably improve standards of living and opportunity doesn't happen because of the hurdles set up by regulatory agencies? How many people who would be in fields where their talents could make the world a better place choose a different field because of the regulatory infestation?

This situation has exposed the perversity of the regulatory state. This is what it always looks like, always acts like.

The "regulatory state" of the previous administration would have been on this a full two months before the deregulatory types running the show now.

You think so? Aren't the CDC and FDA procedures essentially what was implemented after the H1N1 and Ebola situations? Aren't the causes of banks inflexibility due to the regulations passed after 2008 by the Democrats?

Are you suggesting that Clinton would have declared a state of emergency in the last week of January?

N isn't making rational response. If you took at it literally it would involve creating a task force and quarantining Wuhan in November of last year. It would mean deploying the current lock downs in the middle of February.
That's time travel fantasy.

It's a faith based approach, not a logical one.

Wow, who pays you guys?

The previous administration had a pandemic plan that it would have been executing on while this one was still attempting to bluff a virus.

The pandemic plan was implemented by the CDC and FDA in January. The net result was a bunch of very serious, debilitating delays and errors.

Well ultimately, I get paid by Medicare, Medicaid, and private insurers with a small mix of student tuition and general tax funds. As one of the guys who gets to implement said plan I am not seeing all that much deviation from things as I was instructed in them back in 2016.

Lest we forget, when I talked to the CDC over two months ago, they were assuring me that person-to-person transmission was minimal and that asymptomatic carriers were also unlikely to be a major source of transmission. I fault the CDC here, largely for believing the lies of the CCP, but given what they were saying a lot of the exponential stuff was unreasonable.

Likewise, the harms the experts were trying to avoid also make sense given the criminal negligence of the CCP and the WHO early in the pandemic.

Yeah Trump was a couple weeks behind the experts at recognizing that things had fundamentally changed. But by and large the Charlie Foxtrot with testing, halting the WA testing that would have found things earlier, and the like all stem from a gameplan that required the WHO to be functional experts or China not to lie through their teeth.

Look I think Trump is an ass, but Fauci and the rest all were saying supremely counterproductive stuff back in January. We lost the first three months of response to China lying and jumped precisely the wrong way because we believed those lies.

Now me, I kinda think that it has been idiotic to couple ourselves so closely to China. We engaged with a murderous dictatorship that actively worked against pretty much all of our stated global policy goals. And when we had dry runs of this exact problem, nobody at the UN, in Europe, or in either US party wanted to hold China accountable.

I was told, back about five years ago, that the average US family was making a net gain of around $1000 per annum from all our willingness to aid and abet a bad actor. Well, the entire decade's worth of consumer surplus has gone up in smoke already. Pretty much the entire value of our China engagement to the median American family since Jiang Zemin is likely to be roasted by this virus.

We need to plan like the CCP cares more about its PR than about the global economy; the lives of every man, woman, and child on the planet; or long run economic growth. They have proven this multiple times and have been unwilling to change even after they have damned thousands to death.

when the president made a lotta the same points about china 4 years ago they said he was a russian spy

The government response would have been the same, although the messaging probably wouldn't have been as dumb.

There's a call for a Corona Commission going around. If they can keep it bipartisan that's probably the right call. Identify the failures at all levels.

@Skeptical - great, another commission. But while they're at it, they can investigate whether, as probably is the case, SARS-CoV-2 is a chimeric virus. Starting with the thread I posted a while back.

"call for a Corona Commission going around". More political grandstanding is the opposite of what we need right now. Looking for someone to blame and playing the "if only this person or organization had done X" game might be psychologically satisfying but does nothing to further any real understanding. We are watching a vast system respond to the crisis, a system that emerged over decades. Our system is the accumulated result of the many smaller decisions made over those decades. Looking at the past few months for someone-to-blame betrays a profound ignorance of causation.

We don't know now, and won't for a long time, what responses ended up better than others. The things we think must absolutely be done right this second, will almost certainly look very different a few years from now.

But as officials threaten harsher enforcement, critics warn that police are not the answer. They caution against a heavy-handed response that they fear will be doled out unequally across the city. And with hundreds of officers testing positive for the virus, and thousands more out sick, community advocates worry that a more aggressive response would unnecessarily expose scores of people to the disease. While a criminal charge for failure to socially distance does not yet exist, officers have a lot of discretion in their encounters with the public and can arrest people under vague charges like disorderly conduct, obstructing government administration, or resisting arrest. That means that police interventions meant to keep people at a distance could quickly escalate into physical, and possibly violent, interactions.

“It’s basically just setting up police encounters, and any police encounter does have some potential to escalate,” said Jennvine Wong, a staff attorney at Legal Aid’s Cop Accountability Project. “One of the failings right now is the NYPD has not been communicating very clearly to the public what their role actually is in policing during this time. A lot of people are not very clear.”
Cops and hoilding tanks are super spreaders and lots of cops testing positive. We get one or two contradictory rules and the government sector spreads it with a very high R. But those government sectors are the first to fill with anti-bodies two weeks later. There is an echo effect in the first weeks of disequilibrium, in math it is the coffee cup sloshing effect, the coffee gets into a rhythm that ultimately bangs the solid cup surface.

Consider a model of NYC cops accepting applications for obs in a year. One question would be, 'When was your last exposure to Covid', and applicants will take the anti-body test.

Now take that model and apply it now. The application process takes six weeks, but in four weeks most of your cops are vaccinated, immune at this rate, for super spreaders. So, the NYCPD is essentially at equilibrium, they already segregate into the immune and susceptible groups. It is all over but a short lived bunch of hospitalizations.

If you think Brazilian Congress should grant President Captain Bolsonaro exceptional powers to deal with the coronavirus crisis, reply with +1.

It is working as designed.

Anyone who is forced to deal with these people either have scaled enough to absorb the costs and/or moved as much as possible out of their reach into other countries. The only time I've seen these people limited is in Canada during the 90's when an overzealous regulator would cause an immediate decline in government revenues, and they couldn't for various reasons borrow money. So the regulators were told to tone it down.

The regulatory cost will match the government structure that forces it, at equilibrium. This point reduces transactions between them and is minimal cost.

It is the non-market burden of government that creates the large corporate oligarchs. We have to change one of those two key words, "non-market or burden".

This picture is a good indication why NYC is having so many cases:

It's an unverified image, so it might be fake, but given that many people on the train are wearing masks, it's clear that it's at least somewhat recent.

I got it from here:

Food for thought.

In context, I think at a minimum, the city and state of NY could come up with some better operating rules for the subway (which isn't actually run by the city). Just requiring all passengers to have some kind of face covering would be a start. Maybe gloves too. They wouldn't have to be disposable, just cloth gloves you can soak in sanitizer.

Every washable surface in those cars will keep the virus viable for up to three days. This is state of the art public health requirements. They are designed to spread the virus. They are working as designed.

What is the solution? Probably not that hard to come up with a surface that is hostile to viruses. The difficulty would be to get it approved for use.

There are superhydrophobic surfaces being developed with antibacterial properties, which probably will work against virus droplets

Copper/Brass works pretty good. Hospitals should have converted back to brass a decade ago with the prevailing evidence, but it would involve more manual maintenance and labor is expensive in the US.

Or just wear gloves while you're on the subway or out in public.

There's evidence that Covid19 can be exhaled and float for an appreciable time in still air. Unless every sick person, knows their sick and wears a mask, then those train cars will be infectious vectors. Not just by getting directly onto peoples faces, but onto their clothes, handbags, phones, etc.

There really should be a mandate that everyone riding public transit in NYC wear a face covering.

Copper/brass is antimicrobial and probably would not require the approval of malevolent bureaucrats.

It would cost a lot of money. It might only cost a few dollars a pound, but by the time you put a layer of sufficient thickness on the poles, bars, door pads and so on, you've run up a bill in the thousands per car. Copper wears and requires skilled work to install and maintain.

(I once priced a copper bathtub. It was absolutely gorgeous. It cost over $10K! Yikes! Make mine fiberglass.)

Here's a table showing the drop in weekly usage (using MTA turnstile data):

Not sure if that pic is real, but I guess it could be worse?

There were comments attached to the post that indicated that passengers had dropped, but that the transit authority had also cut the number of trains, so....

It’s getting hard to argue against your point. As you pointed out in some other posts, it’s also about legalism too. Hopefully we learn from this crisis.


In a month. Any bureaucrat that delays things a month needs to be tarred and feathered. Being generous here.

Regulation makes the economy more oligarchic? You don’t say!

I thought the trust busters were promoting competition.....

I mean after all Western Europe is a wonderland of lean and mean Schumpterian edged firms.

I smell a new book.

Stagnation by Strangulation.

Amazon non-fiction best seller, 2021: "Stagflation: What it is and how to profit from Stagnation and Inflation".

Not at all surprising.

You can still trade profitably in long-short strategies based on which firms will be most hurt by certain regulations. The frequency of these events has declined significantly with Trump though.

NEW YORK (AP) — Tiffany Pinckney remembers the fear when COVID-19 stole her breath. So when she recovered, the New York City mother became one of the country’s first survivors to donate her blood to help treat other seriously ill patients.

“It is definitely overwhelming to know that in my blood, there may be answers,” Pinckney told The Associated Press.

Doctors around the world are dusting off a century-old treatment for infections: Infusions of blood plasma teeming with immune molecules that helped survivors beat the new coronavirus. There’s no proof it will work. But former patients in Houston and New York were early donors, and now hospitals and blood centers are getting ready for potentially hundreds of survivors to follow.


Anti-body production is increasing at the rate of virus spread, but it two weeks late to the ball game. Within weeks, and many deaths, the cities find that anti-bodies consume almost all of the spread transactions, that is, more people in remission then are getting infected.

You trolling? Old news...

Interesting hypothesis that people with type O blood, are less likely to be infected or die than other blood groups.
Group A has the highest susceptibility and Group O which possesses anti A antibodies the lowest. Specially, those with O blood type regularly have more IgG anti-A and anti-B than any others.
It seems blood O types are infected/die at 75% the rate of prevalence in the population.
This was true for SARS-CoV and seems to be true for SARS-CoV2

@Cat: O+ (common) or O- (rarer)?

It's not specified. They both have anti-A antibodies

Hum... Boeing is a growing, profitable but highly regulated company. In the name of deregulation the FAA allows Boeing to self regulate. Without an outside force ensuring compliance short term pressure on executives causes them to cut corners. These cut corners accumulate until a small but massive flaw results in $10s of billions in losses.

How do these studies account for regulations that prevent business from falling victim to their own greed and shortsightedness?

The regulatory state created one large manufacturer. It makes boneheaded mistakes. The FAA finds justification for an increase in budget and scrutiny.

Working as designed.

There's even a Wikipedia entry on this, Tombstone Mentality to describe the FAA, which only reacts, from time immemorial, to disasters, and is not proactive (Comet jet with square windows comes to mind, led to today's stress-free rounded corner airplane windows)

Did the study find any corporate memos suggesting they found a good deal on government goods and should rush off a tax payment for advanced purchase?

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>regulatory risk is a major cost to firms

Really now. Wow. Just wow.

You say that like it's too obvious to be repeated. And yet there will be plenty of people who deny it.

"Measuring the Cost of Regulation:"

I wonder if you could set a tax deduction for regulations, where companies could take a tax deduction for the cost of any regulation. Let either an industry standards / accounting board come up with an expected cost.

But then allow any business to take a smaller deduction for the cost of the regulation. If they did so, other companies would then owe the difference. Thus the tax basis would always be based on the corporation taking the lowest deduction (the most efficient) and everyone else would be forced to use that cost basis.

It would pass the base cost of all regulations back to the taxing agencies.

"We derive a measure of firm-level regulatory costs from the text of corporate earnings calls"

Not going to pay to read the paper but what exactly does this mean? If the company complains about regulatory costs in the call they count it?

" It has never been more relevant, except that the estimates for regulatory costs turn out to be far too low (no criticism of the authors is intended here). "

Is not the standard theory that regulation is easily subject to capture by the industry? Shouldn't Tyler expect to see the opposite? Firms that complain a lot about their heavy regulatory burden actually end up with better results.

You'd expect failing firms to blame regulation in their communication with investors. Also does "regulatory risk" mean costs of existing regulation or the risk of additional regulation?

OK so basically companies that say in their investor calls "everything is great, we really know what we're doing" enjoy a lower cost of capital, better returns etc. Companies that say "ohhh regulation is killing us" see the opposite.

This gets published as research on the cost of regulation?!

Given the current state of emergency, I am sure regulations could be waived for the duration. In fact, in many places they have been. Unfortunately, our national leadership is more focused on repealing fuel standards, encouraging polluters and scamsters and supporting profiteering than removing regulatory barriers that hinder our response to COVID-19.

If a regulation is proper -- has forced a firm to internalize some negative externality -- then slower growth is a feature not a bug.

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