RegTech Adoption and the Cost of Capital

Abstract

This paper studies the real effect of a major RegTech event - the staggered implementation of the SEC’s EDGAR system in 1993-1996. This event represents an exogenous shock to corporate information dissemination technologies, which leads to a considerable reduction in information acquisition costs for investors. We find evidence that firms’ cost of equity capital declines substantially after they switch from paper filing to mandatory electronic filing in EDGAR. The effect is stronger for small firms and firms with low institutional ownership. We identify three channels via which the EDGAR implementation affects firms’ capital cost: liquidity, risk-taking, and corporate governance channels. EDGAR filing firms experience a significant drop in firm risk and an improvement in stock liquidity and corporate governance.

Keywords: RegTech, information acquisition cost, cost of capital, liquidity, corporate governance, EDGAR

JEL Classification: G30, G32, G34