What Is Legislative Risk?
Legislative risk refers to the possibility that governmental laws or legislation may materially impact the business prospects of one or more companies. These changes may negatively impact investment holdings in that company. Government action or changes in the company’s customers’ demand patterns can directly result in legislative risk.
It may be that all investors secretly want to make money off of bailouts and special treatment for particular companies, so they rarely protest about them. They do, however, have complaints about taxes and restrictions. Regulation and taxation have the power to take away from industry what subsidies and tariffs can give in the form of competitive advantages. They can cause global ripple effects and devastate entire industries and businesses with a single bill, subsidy, or printing press change. Therefore, many investors consider legislative risk a significant consideration when assessing stocks.
When considering the government for the purposes under which it functions, a sizable investment may not end up being all that fantastic. (For similar reading, see Risk and the Government: A Love-Hate Relationship.)
Legislative Risk: An Explanation
The apprehensive relationship between governments and businesses is known as legislative risk. It’s possible that governmental actions would restrict a business or sector, which would negatively impact investors’ holdings in that business or sector. An antitrust lawsuit, new rules or standards, particular taxes, subsidies, and so forth are some ways the real danger may manifest itself. Industry-specific legislative risk varies, although all industries are exposed to some extent.
The idea is that the government serves as a buffer between the public and economic interests. When industry threatens the public and doesn’t seem to want to regulate itself, it is the government’s job to intervene. The government frequently enacts too many laws in practice. In addition to giving each congressman prominence, this legislation improves the public’s perception of the government’s significance. Strong incentives like these raise the risk of legislation beyond what is needed.
Legislative Risk in the Real World
The healthcare sector is a business with significant legislative risk. Healthcare providers and drug manufacturers face numerous continuing legal challenges with their patients regarding insurance coverage and other payment-related matters, and Stores, Inc. (WMT) provides another example. Under its operating risk section, the company disclosed significant political risks it faces in its annual 10-K filing with the Securities and Exchange Commission (SEC). The company’s section on regulatory, compliance, reputational, and other risks describes the risks related to legislative, judicial, regulatory, and political/economic issues. Among the listed risk factors are
- Unrest in politics
- Restraints from the law and regulations
- Local environmental regulations and product safety
- Local labor laws and tax regulations
- Trade agreements.
- Rules govern money.
Wal-Mart listed probable political and economic volatility in the nations where its international suppliers operate as one of the risks connected with its suppliers. State labor concerns and challenges with international trade agreements and tariff impositions are also present. The corporation notably mentions China and Brazil, highlighting the intricacies of their national, state, and local legislation.
Conclusion
- If a business can’t serve its customers anymore because of changes in the law, those changes can hurt its chances of success.
- Putting taxes and other rules on an industry may make buyers less likely to invest.
- If people in a company don’t follow the rules, the government steps in to regulate it.
