When Regulators Scrutinize Your Neighbor, Your Company May Change Too

Regulation is usually evaluated by looking at the firms regulators directly target. But enforcement can travel farther than an inspection, fine, or formal violation notice. Nearby companies can observe what happens to a peer, reassess their own risk, and change behavior before regulators ever knock on their door.

That local spillover is the focus of “Local regulatory anticipation and GHG emissions,” a 2026 Strategic Management Journal study by Leandro Nardi. Examining U.S. greenhouse-gas emissions, the paper finds that increased scrutiny of a nearby peer is associated with lower emissions among firms that were not themselves targeted—and that the effect weakens with geographic distance.

The Research

Nardi studies a 2014 change in the U.S. Environmental Protection Agency’s High-Priority-Violation policy. The revision concentrated regulatory scrutiny more strongly on facilities with serious or repeated environmental violations.

The analysis compares non-targeted facilities that had a high-priority-violation peer in the same county with non-targeted facilities that had no such county peer. The main dataset includes more than 2,700 U.S. facilities from 2012 through 2019 and combines EPA emissions, violation, enforcement, and facility data..

Using a difference-in-differences framework, the paper examines whether firms changed greenhouse-gas emissions after nearby peers became subject to heightened scrutiny.

The author is cautious about interpretation. Although the policy change provides useful variation and multiple tests support the empirical design, the mechanism affecting non-targeted firms is indirect. The results are therefore described as consistent with regulatory anticipation rather than as strict causal estimates.

Non-Targeted Firms Were Associated With 7% Lower Emissions

Following the 2014 policy change, non-targeted facilities with a scrutinized peer in the same county were associated with approximately 7% lower greenhouse-gas emissions on average.

A back-of-the-envelope calculation in the paper values the lower emissions at more than $200,000 for the median treated facility using the U.S. social cost of carbon.

The central idea is regulatory anticipation. When firms observe enforcement directed at relevant peers, they update their beliefs about their own probability of future scrutiny or sanctions. Reducing emissions can become a preemptive strategic response rather than a reaction to direct enforcement.

Regulatory Signals Were Local

The empirical pattern was not uniform across geography. Facilities located closer to scrutinized peers showed larger emission reductions, and the pattern weakened sharply beyond roughly 40 kilometers.

A continuous distance-decay analysis similarly shows that greater geographic exposure to high-priority peers predicts lower emissions after the policy revision.

That finding challenges the assumption that firms respond primarily to enforcement anywhere within a broad state or regulatory jurisdiction. Nearby actions can carry more informational weight because local peers operate under more comparable conditions and provide more relevant clues about what regulators might do next.

Sanction Risk Changed How Firms Reacted

Proximity alone was not enough. The response was substantially stronger among facilities that already faced higher environmental-sanction risk because of prior violations and enforcement actions.

That pattern fits the anticipation mechanism: a signal matters more when a company believes the threat could credibly apply to it.

The paper also examines Texas, where political and legal resistance had signaled lower expected enforcement of greenhouse-gas regulation. Regulatory-anticipation patterns were significantly weaker there, again supporting the role of perceived sanction credibility.

Regulation Can Affect More Firms Than Regulators Directly Touch

For policymakers, this is the most consequential finding. Enforcement resources may have multiplier effects.

A regulator that intensifies scrutiny of one facility may influence nearby companies that are never formally targeted. Conversely, areas with little visible enforcement may become “regulatory deserts,” where companies receive fewer credible signals that poor environmental performance will attract attention.

The paper suggests that geographically dispersed enforcement can potentially broaden regulatory impact by increasing the number of firms exposed to salient local signals.

What Managers Should Do Differently

For Policymakers, Avoid Enforcement Deserts

If anticipation is partly local, concentrating enforcement too narrowly may leave large areas with weak regulatory signals. The paper suggests that dispersing visible enforcement activity may increase indirect environmental benefits beyond directly targeted facilities.

The Takeaway

Regulatory strategy is not only about the rules written in Washington or the notice delivered to your own facility. Nardi’s study shows that firms can learn from what regulators do to companies nearby.

Non-targeted facilities exposed to heightened scrutiny of county peers were associated with about 7% lower greenhouse-gas emissions, with stronger patterns among firms close to those peers and already facing credible sanction risk.

For managers, the question is not simply, “Are regulators targeting us?” It is also, “What are regulators doing around us, and what does that tell us about the risk we may face next?”