The Costs and Benefits of Mandatory Securities Regulation: Evidence from Market Reactions to the JOBS Act of 2012

52 Pages Posted: 13 Jul 2013 Last revised: 15 Feb 2016

See all articles by Dhammika Dharmapala

Dhammika Dharmapala

University of Chicago Law School

Vikramaditya S. Khanna

University of Michigan Law School

Multiple version iconThere are 2 versions of this paper

Date Written: April 17, 2015

Abstract

The effect of mandatory securities regulation on firm value has been a longstanding concern across law, economics and finance. In 2012, Congress enacted the Jumpstart Our Business Startups (“JOBS”) Act, relaxing disclosure and compliance obligations for a new category of firms known as “emerging growth companies” (EGCs) that satisfied certain criteria (such as having less than $1 billion of annual revenue). The JOBS Act’s definition of an EGC involved a limited degree of retroactivity, extending its application to firms that conducted initial public offerings (IPOs) between December 8, 2011 and April 5, 2012 (the day the bill became law). The December 8 cutoff date was publicly known prior to the JOBS bill’s key legislative events, notably those of March 15, 2012, when Senate consideration began and the Senate Majority Leader expressed strong support for the bill. We analyze market reactions for EGCs that conducted IPOs after the cutoff date, relative to a control group of otherwise similar firms that conducted IPOs in the months preceding the cutoff date. We find positive and statistically significant abnormal returns for EGCs around March 15, relative to the control firms. This suggests that the value to investors of the disclosure and compliance obligations relaxed under the JOBS Act is outweighed by the associated compliance costs. The baseline results imply a positive abnormal return of between 3% and 4%, and the implied increase in firm value is at least $20 million for an EGC with the median market value in our sample.

Keywords: Securities regulation, JOBS Act of 2012, Emerging growth companies

JEL Classification: G18, K22

Suggested Citation

Dharmapala, Dhammika and Khanna, Vikramaditya S., The Costs and Benefits of Mandatory Securities Regulation: Evidence from Market Reactions to the JOBS Act of 2012 (April 17, 2015). Journal of Law, Finance & Accounting, Forthcoming; University of Chicago Coase-Sandor Institute for Law & Economics Research Paper No. 701. Available at SSRN: https://ssrn.com/abstract=2293167 or http://dx.doi.org/10.2139/ssrn.2293167

Dhammika Dharmapala (Contact Author)

University of Chicago Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States

Vikramaditya S. Khanna

University of Michigan Law School ( email )

625 South State Street
Ann Arbor, MI 48109-1215
United States
734-615-6959 (Phone)

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