HKU Jockey Club Enterprise Sustainability Global Research Institute
World-Class Hub for Sustainability
Joseph Kalmenovitz | Michelle Lowry | Ekaterina Volkova
Regulatory Fragmentation
Apr 16, 2026
Key Takeaways
- Research Question: Regulatory fragmentation occurs when multiple federal agencies oversee a single issue. This research provides the first systematic evidence on the extent of regulatory fragmentation, and examines its impact on the economic performance and competitive landscape of U.S. companies.
- Data and Method: The researchers employ Latent Dirichlet Analysis (LDA) to detect 100 topics discussed in all proposed rules, final rules, and notices in Federal Register (FR)—the daily journal of U.S. government activity—focusing on the 1994–2019 period. Exposure to company-specific regulatory fragmentation is measured by first estimating each firm’s exposure to 100 regulatory topics based on the text of its annual reports. An HHI-based index is then constructed to capture each topic’s dispersion across regulatory agencies, and these indices are weighted by the relevance of each topic to the firm. Empirical analyses rely on panel regressions with firm- and industry-year fixed effects, with additional placebo tests and robustness analyses to mitigate endogeneity concerns.
- Findings
- High regulatory fragmentation is associated with increased firm costs (selling, general, and administrative expenses, or SG&A), decreased productivity (total factor productivity, or TFP), profitability (return on assets, or ROA), and growth (sales and assets).
- Fragmentation functions as a barrier to entry, deterring new firms from entering an industry while increasing that small incumbent firms exit.
- The economic burden of fragmentation arises from redundancy and, more prominently, from inconsistencies between government agencies.
- Implication: The findings uncover a new source of regulatory burden and show agency costs among regulators contribute to this burden. Policymakers can reduce the economic burden of fragmented oversight by mandating inter-agency coordination and co-authoring rules to minimize regulatory inconsistencies.
Source Publication:
Kalmenovitz, J., Lowry, M., & Volkova, E. (2025). Regulatory fragmentation. The Journal of Finance, 80(2), 1081–1126.
Background and Research Questions
Whereas traditional literature focuses on the costs of complying with specific regulations, this study highlights a distinct burden arising from the “industrial organization” of the federal government. The research examines the extent of regulatory fragmentation, defined as multiple agencies overseeing a single topic, and its impact on the economic performance and competitive landscape of U.S. companies.
Data and Methodology
The analysis relies on the full text of the FR, the official daily publication of the U.S. federal government, covering the 1994–2019 period. The researchers utilized LDA to identify 100 distinct regulatory topics and measured fragmentation of each topic by calculating the dispersion of agency involvement through an HHI-based index. To determine firm-specific exposure, the study applies a pre-trained LDA model to the text of company annual reports, using the detected probabilities of the topics as weights in fragmentation calculations. The final dataset includes 60,573 company-year observations, and the methodology is validated by verifying that firms with high fragmentation scores are mentioned by more agencies in official documents. The measure accounts for both the cross-sectional variety of topics a firm faces and the time-series changes in how those topics are regulated.
Figure 1. Time Trends in Regulatory Fragmentation
Note: This figure shows the average level of regulatory fragmentation for each Fama-French 12 industry each year, over the 1995–2019 period.
The empirical strategy identifies the effects of fragmentation by employing regressions with firm- and industry-year fixed effects, which allows for the isolation of fragmentation impacts from general industry trends or time-invariant firm characteristics. To address endogeneity concerns, the authors utilize three distinct approaches: (1) Exclude firm-years with a substantial change in operations; (2) estimate placebo tests with 1,000 iterations of random matching between firm topics and FR topics to verify that the observed significance was not accidental; and (3) apply the Oster (2019) methodology to evaluate the stability of coefficients when control variables are omitted.
Findings and Discussion
The study finds regulatory fragmentation is detrimental to firms across multiple financial and operational dimensions. Companies facing high fragmentation experience significantly higher SG&A expenses, suggesting managing oversight from multiple bodies consumes substantial internal resources. This diversion of resources correlates with a decrease in total factor productivity (TFP) and ROA. Furthermore, fragmentation leads to slower sales and asset growth, because the increased regulatory burden likely reduces the number of projects with a positive net present value.
Figure 2. Scatter Bin Plots of Main Outcome Variables, as a Function of Regulatory Fragmentation
Note: We divide our sample into 50 bins by firm-year regulatory fragmentation. Each plot shows the average value of one of our six main outcome variables, within each of the 50 bins, after controlling for year and industry fixed effects.
Additionally, fragmentation serves as a competitive filter; it deters new initial public offerings (IPOs) and increases the propensity for small firms to exit an industry, which can lead to increased industry concentration.
The authors identify regulatory inconsistency as a more significant cost driver than mere redundancy. When agencies co-author documents, which indicates coordination, the negative effects on firm performance are less pronounced. However, when agencies issue independent, solo-authored rules on the same topic, firms face conflicting requirements that create uncertainty and inhibit planning. Fragmentation also appears to reduce regulatory capture; firms with high fragmentation exposure exhibit lower lobbying expenditures, likely because the dispersion of oversight obscures where firms should focus their influence efforts.
The evidence further suggests fragmentation is partially driven by internal agency incentives. Analysis of federal employee data reveals promotions are positively related to agency activity, particularly when an agency expands into topics outside its core expertise. This “empire building” behavior by regulators contributes to the overall fragmented landscape.
Implications
The findings demonstrate the structure of the federal government imposes a quantifiable economic burden that is distinct from the sheer volume of regulation. For policymakers, the study suggests reducing inconsistencies through better inter-agency coordination (e.g., co-authoring rules) could mitigate the negative impacts on corporate productivity and growth. In the market, fragmentation serves as a competitive filter that disproportionately harms small firms, which lack the scale to absorb the fixed costs of navigating a complex, multi-agency environment. Consequently, high levels of fragmentation may lead to increased industry concentration by deterring new entrants and pushing out smaller incumbents. These results provide a new lens for evaluating regulatory reform, highlighting the need to address the “industrial organization” of the regulators themselves to foster a more efficient economic environment.