The Debt-Equity Choice When Securities Regulations are Scaled by Equity Values: Evidence from SOX 404

46 Pages Posted: 18 Oct 2015

See all articles by David P. Weber

David P. Weber

University of Connecticut - Department of Accounting

Yanhua Sunny Sunny Yang

University of Connecticut - School of Business; University of Connecticut - School of Business

Date Written: September 1, 2015

Abstract

We study the effects of scaling regulatory requirements by equity values on firms’ subsequent financing choices. When larger market values of equity result in being subject to costly regulation, smaller firms have incentives to shift their sources of financing toward debt and away from equity. We use the Sarbanes-Oxley Act of 2002 (SOX) as a setting to provide evidence of such incentives. Smaller firms were granted several reprieves and eventually exempted from the internal control requirements of SOX Section 404, which many consider the most costly and onerous aspect of SOX. Using a difference-in-differences design, we show that relative to control firms, firms below the regulatory threshold have increased propensities to issue debt, decreased propensities to issue equity, and increased leverage levels in the post-SOX period. These results are consistent with smaller firms altering their financing choices and capital structures to maintain their exempt status and demonstrate an unintended consequence of scaled regulatory regimes.

Keywords: scaled regulation, financing choices, capital structure, Sarbanes-Oxley, internal controls

JEL Classification: G32, G38, K22, M2, M4

Suggested Citation

Weber, David P. and Yang, Yanhua Sunny, The Debt-Equity Choice When Securities Regulations are Scaled by Equity Values: Evidence from SOX 404 (September 1, 2015). Available at SSRN: https://ssrn.com/abstract=2675366 or http://dx.doi.org/10.2139/ssrn.2675366

David P. Weber (Contact Author)

University of Connecticut - Department of Accounting ( email )

School of Business
Storrs, CT 06269-2041
United States

Yanhua Sunny Yang

University of Connecticut - School of Business ( email )

2100 Hillside Road
Storrs, CT 06269-1041
United States
8604864696 (Phone)
8604864838 (Fax)

HOME PAGE: http://www.business.uconn.edu/person/yanhua-sunny-yang/

University of Connecticut - School of Business ( email )

2100 Hillside Rd, Unti 1041A
Storrs, CT 06238
United States
8604864696 (Phone)

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