Estimating Firms’ Responses to Securities Regulation Using a Bunching Approach

Abstract

Many important provisions of US securities law – most notably, crucial elements of the Sarbanes-
Oxley (SOX) legislation enacted in 2002 – apply only to firms that have a public float of at least
$75 million. Public float (i.e., the market value of shares held by non-insiders) is not
comprehensively reported in standard databases, so I “scrape” public float data from firms’ 10-K
filings for an extensive sample of reporting entities over fiscal years 1993-2015. I use a bunching
approach that compares the number of observations immediately below the $75 million threshold
to a smooth counterfactual density. Prior to SOX (i.e., over 1993-2002), there is no detectable
bunching. Following SOX (i.e., over 2003-2015), there is statistically significant evidence of
bunching. However, the magnitude of bunching is relatively modest. Moreover, bunching is
concentrated in the early post-SOX years (2003-2009), and is virtually absent in later years (2010-
2015). The magnitude of bunching is not a sufficient statistic for the compliance costs of securities
regulation because the costs of managing public float are unobservable. Nonetheless, the results
of our bunching analysis cast some doubt on widespread claims that the regulatory burdens of
these securities law provisions are large.

Keywords: Securities regulation; Sarbanes-Oxley; Public float; Compliance costs; Bunching analysis

JEL Classification: G38; K22