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Financial Reporting Regulation and Financing Decisions

56 Pages Posted: 17 Sep 2012 Last revised: 7 Apr 2017

Patricia L. Naranjo

Rice University

Daniel Saavedra

UCLA Anderson School of Management

Rodrigo S. Verdi

Massachusetts Institute of Technology (MIT)

Date Written: April 6, 2017

Abstract

We study the influence of a major reform in financial reporting regulation on financing decisions. Across a battery of tests, we document an increase in the issuance of external financing around the new regime. Further, firms make different financing decisions around the new regulation depending on their ex-ante debt capacity, allowing them to adjust their capital structure. Our results are accentuated across firms facing higher adverse selection costs and are consistent with the new regulation reducing underinvestment among constrained firms. Our findings highlight the importance of financial reporting regulation in explaining financing as well as investment policies, and provide insights into which firms are more likely to benefit from it.

Keywords: Financial Reporting Regulation, Financing Decisions, Information Asymmetry, Capital Structure, International Accounting, IAS, IFRS

JEL Classification: G15, G30, G32, M41

Suggested Citation

Naranjo, Patricia L. and Saavedra, Daniel and Verdi, Rodrigo S., Financial Reporting Regulation and Financing Decisions (April 6, 2017). Available at SSRN: https://ssrn.com/abstract=2147838 or http://dx.doi.org/10.2139/ssrn.2147838

Patricia Naranjo

Rice University ( email )

6100 South Main Street
McNair Hall - Room 343
Houston, TX 77005-1892
United States
7133485386 (Phone)

Daniel Saavedra

UCLA Anderson School of Management ( email )

Los Angeles, CA
United States

Rodrigo Verdi (Contact Author)

Massachusetts Institute of Technology (MIT) ( email )

Sloan School of Management
100 Main Street E62-666
Cambridge, MA 02142
United States
(617) 253 2956 (Phone)

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