Quantifying the Interaction between Regulatory Arbitrage and Firm Valuation

Abstract

The accelerating pace of global regulatory convergence, typified by the OECD’s Pillar Two and the Basel III output floors, has fundamentally altered the risk-return profile of corporate jurisdictional optimization. This paper addresses the Regulatory Strategy Dilemma: the strategic tension between exploiting cross-border regulatory heterogeneities for short-term cost efficiency and adopting proactive compliance to secure long-term valuation stability. While traditional finance literature examines regulatory arbitrage and governance compliance as isolated phenomena, this study identifies a critical "valuation tipping point." Research bridges this gap by analysing how increasing institutional transparency and technological oversight (RegTech) diminish the historical "arbitrage premium" while amplifying "governance resilience."

Using a global panel dataset of multinational enterprises (MNEs) and financial institutions from 2018 to 2025, we employ a System Generalized Method of Moments (GMM) to control for endogeneity and the persistence of valuation metrics. Our empirical strategy utilizes Tobin’s Q and Cost of Equity as primary dependent variables, regressed against a proprietary Arbitrage Intensity Index and Net ESG (N-ESG) performance scores.

Preliminary findings indicate a structural shift: whereas arbitrage strategies yielded 4–7% abnormal returns in the pre-2022 era, these gains have significantly compressed. Conversely, firms prioritizing proactive compliance now experience a 0.9–1.3% reduction in cost of equity and superior risk-adjusted valuations. Our results suggest that in high-transparency regimes, the "complexity discount" associated with opaque arbitrage structures now outweighs the fiscal benefits, signaling a permanent reallocation of market premiums toward regulatory alignment.