Asset-Pricing Evidence of Regulatory Capture

I test theories of regulation using comprehensive datasets on regulatory changes, equity returns, and firm fundamentals. I find that firms in industries subject to more regulation earn significantly higher returns than firms in deregulated industries. A long-short regulatory portfolio earns 9.8% annual alpha (t−statistic of 4.4). This return effect coincides with significant increases in cash flow generation for regulated versus deregulated industries. Regulated industries have lower net entry of new establishments, and I find evidence that lobbying firms have better return outcomes following regulatory changes. Overall, these findings are consistent with regulatory capture and inconsistent with the public interest theory