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Unintended Consequences of Granting Small Firms Exemptions from Securities Regulation: Evidence from the Sarbanes-Oxley Act

62 Pages Posted: 14 Sep 2007 Last revised: 21 Apr 2009

Feng Gao

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Joanna Shuang Wu

University of Rochester - Simon Business School

Jerold L. Zimmerman

University of Rochester - Simon Business School

Multiple version iconThere are 2 versions of this paper

Date Written: September 3, 2008

Abstract

This paper provides evidence about the unintended consequences arising when small companies are exempted from costly regulations - these firms have incentives to stay small. Between 2003 and 2008, the SEC postponed compliance with Section 404 of the Sarbanes-Oxley Act of 2002 (SOX) for "non-accelerated filers" (firms with public float less than $75 million). We hypothesize and find that some of these firms had an incentive to remain below this bright line threshold. Moreover, we document that these firms remained small by undertaking less investment, making more cash payouts to shareholders, reducing the number of shares held by non-affiliates, making more bad news disclosures and reporting lower earnings than control firms. Finally, there is no evidence that firms remaining small are doing so to maintain insiders' private control benefits. These findings have implications beyond SOX because numerous federal and state regulations exempt small firms via bright line size thresholds.

Keywords: unintended consequences, regulations, Sarbanes-Oxley Act, Section 404

JEL Classification: G18, G31, G32, G35, K22, M41

Suggested Citation

Gao, Feng and Wu, Joanna Shuang and Zimmerman, Jerold L., Unintended Consequences of Granting Small Firms Exemptions from Securities Regulation: Evidence from the Sarbanes-Oxley Act (September 3, 2008). Journal of Accounting Research, Forthcoming; Simon School Working Paper No. FR 07-07. Available at SSRN: https://ssrn.com/abstract=1014054

Feng Gao

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

Janice H. Levin Bldg., Room 121
94 Rockafeller Road
Piscataway, NJ 08854-8054
United States

Joanna Shuang Wu (Contact Author)

University of Rochester - Simon Business School ( email )

Carol Simon Hall 3-160D
Rochester, NY 14627
United States
585-275-5468 (Phone)
585-442-6323 (Fax)

Jerold L. Zimmerman

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States
585-275-3397 (Phone)
585-442-6323 (Fax)

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