Firm-level regulatory intensity and corporate strategic change

We empirically examine the impact of firm-level regulatory intensity, an external force or context, on corporate strategic change (i.e. changes in a firm's financing, investing and operating decisions to boost its competitive advantage and performance). Using a sample of 78,523 firm-year observations of US firms from 1995–2019, we model firm strategic change as a function of firm-level regulatory intensity and other firm characteristics. We estimate the model using OLS regression with standard errors clustered at the firm level to generate statistical inference, controlling for firm- and year-fixed effects. Robustness tests include various methodologies, including propensity score matching, entropy balancing and instrumental variable approaches. We also employ alternative measures of firm-level regulatory intensity and corporate strategic change to further validate our results. Regulatory intensity decreases the extent of corporate strategic change, providing evidence that managers become more cautious and conservative in undertaking strategic changes when facing a greater regulatory burden. This finding is robust to various model specifications and alternative proxies for strategic change, suggesting that regulations may hinder firms from making strategic changes in a timely manner. Delayed strategic changes can lead to negative effects on a firm's performance in the short run and growth in the long run. Further analysis shows that regulatory intensity reduces strategic changes in resource allocations but induces more strategic changes in corporate capital structure. We enrich the literature on corporate strategic change and the association between regulatory intensity and corporate decision-making. The finding that corporate managers are more cautious in implementing strategic changes when facing a high level of regulatory compliance provides important implications to regulators and managers. To mitigate the unintended effects of regulations on businesses, policymakers should be more prudent in initiating and passing new regulations by adopting a more evidence-based and transparent approach and regulators and regulation implementing agencies should provide sufficient compliance support. Corporate managers need to proactively engage in the rule-making process to turn intensified compliance into business strategy drivers and undertake timely changes to enhance performance and long-term competitiveness.