The Debt-Equity Choice When Regulatory Thresholds are Based on Equity Values: Evidence from SOX 404

Posted: 27 Jun 2019 Last revised: 4 Nov 2019

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

Multiple version iconThere are 2 versions of this paper

Date Written: June 20, 2019

Abstract

When larger market values of equity result in being subject to costly regulation, 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 audit 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 just 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 firms altering their financing choices to maintain their exempt status and demonstrate an economic consequence of regulatory regimes that are tiered by equity values.

Keywords: regulatory thresholds, debt-equity choice, financing, SOX 404, internal controls

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

Suggested Citation

Weber, David P. and Yang, Yanhua Sunny, The Debt-Equity Choice When Regulatory Thresholds are Based on Equity Values: Evidence from SOX 404 (June 20, 2019). The Accounting Review, Forthcoming, University of Connecticut School of Business Research Paper No. 19-16, Available at SSRN: https://ssrn.com/abstract=3409281

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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