Regulatory capture is real

Europe is the world champion in regulation. I would even go so far as to say that regulation is one of our most important exports. But regulations exist everywhere, even in the US. Industries such as finance, utilities and energy face stricter regulations than other sectors, and for good reasons. But how does regulation affect stock prices, and can companies act as regulators and increase regulation?

Regulatory capture in this context means that companies can influence regulators and government agencies that supervise them in such a way that they gain a competitive advantage.

Alan Crane and Andrew Koch measured the intensity of regulation of different sectors in the US between 1980 and 2020. They then looked not only at the valuation of US companies in different sectors (they use Price/Book ratios) and how regulations affect these valuations, but also at whether political connections help a company. Finally, they look at the famous revolving door of industry insiders going to regulators, and regulators taking on roles in the companies they used to regulate to measure the effect of the regulations.

First, they find that companies that face stricter regulations have lower valuations on average. This is not surprising, as regulations tend to limit growth and protect stakeholders other than shareholders (e.g. the environment, employees, customers). These regulations increase costs, reduce margins and reduce growth opportunities compared to a completely unregulated Wild West market. But of course, these rules also create other benefits, such as a safer workplace for workers, a cleaner environment, and consumer products that don’t kill or harm the people who use them.

You only have to look at the almost completely unregulated crypto space to know that the high growth rates there come with the downside of massive crime. This study from 2025 estimates that as many as 98% of meme coins show signs of fraud, such as pump-and-dump activity or rug-pulling.

Meanwhile, regulations are increasingly being exploited by companies to their advantage. The chart below shows that companies operating in more heavily regulated sectors have higher valuations than companies in less regulated sectors when there is a revolving door, i.e. when regulators become sector experts, and vice versa. And the more regulators are populated by industry insiders, the higher the valuations become. The driver for this is simple. Companies in highly regulated industries use regulators to protect their businesses from new entrants and international competition. This helps them reduce competition, increase margins and of course create higher profits that are rewarded with higher valuations.

The relationship between business valuation, regulatory intensity and the size of the revolving door

Source: Crane and Koch (2025).