Measuring and Modeling the U.S. Regulatory Ecosystem

Michael J Bommarito Ii,Daniel Martin Katz

doi:10.1007/s10955-017-1846-3

Michael J Bommarito Ii, Daniel Martin Katz

Open Access

https://doi.org/10.1007/s10955-017-1846-3

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Abstract

Over the last 23 years, the U.S. Securities and Exchange Commission has required over 34,000 companies to file over 165,000 annual reports. These reports, the so-called “Form 10-Ks,” contain a characterization of a company’s financial performance and its risks, including the regulatory environment in which a company operates. In this paper, we analyze over 4.5 million references to U.S. Federal Acts and Agencies contained within these reports to measure the regulatory ecosystem, in which companies are organisms inhabiting a regulatory environment. While individuals across the political, economic, and academic world frequently refer to trends in this regulatory ecosystem, far less attention has been paid to supporting such claims with large-scale, longitudinal data. In this paper, in addition to positing a model of regulatory ecosystems, we document an increase in the regulatory energy per filing, i.e., a warming “temperature.” We also find that the diversity of the regulatory ecosystem has been increasing over the past two decades. These findings support the claim that regulatory activity and complexity are increasing, and this framework contributes an important step towards improving academic and policy discussions around legal complexity and regulation.

Highlights

Like ecosystems, exhibit dynamic, complex behaviors resulting from the interaction of “organisms” inhabiting, altering, and being altered by their “environment.” In the case of economies, organisms can be seen as companies, and environments can be seen, at least in part, as regulations
We have presented the first large-scale, longitudinal characterization of the energy, “temperature,” and diversity of the regulatory ecosystem as characterized by our spatial model
Using a bitstring representation of firm regulatory exposure, we have confirmed that the aggregate Federal regulatory ecosystem is becoming more diverse over time, providing evidence in support of the claim that regulatory complexity is increasing

Summary

Introduction

Like ecosystems, exhibit dynamic, complex behaviors resulting from the interaction of “organisms” inhabiting, altering, and being altered by their “environment.” In the case of economies, organisms can be seen as companies, and environments can be seen, at least in part, as regulations. We analyze more than 20 years, 30,000 companies, and 160,000 10-K reports to identify more than 4.5 million references to U.S Federal regulatory Acts and Agencies Using these references, we generate a reproducible, quantitative, and longitudinal measurement of the energy, “temperature,” and diversity of the U.S regulatory “ecosystem.” We find a clear increase for all of these measures, with double- to triple-digit growth over the last 20 years. Form 10-K filings generally contain at least four parts and fifteen schedules, which collectively offer a wealth of useful information about registered companies These parts include a characterization of a company’s financial health, legal risks, and other systematic and idiosyncratic factors, such as the nature of the regulatory environment in which it operates. We identify more than 4.5 million Act and Agency references contained in 10-K reports over the past 23 years

Theory of Regulatory Ecosystems

Methodology and Results

Conclusion and Future Work