Regtech Adoption and the Cost of Capital

This paper studies the cost of capital effect of a major RegTech event: the staggered implementation of the SEC’s EDGAR system in the period from 1993 to 1996. This event represents a largely exogenous shock to corporate information dissemination technologies, resulting in a considerable reduction in information acquisition costs for investors. Using a difference-in-differences research design, we show that the cost of equity capital declines substantially after a firm switches from paper filing to mandatory electronic filing in EDGAR. The effect is stronger for small firms and firms with low analyst coverage and low institutional ownership. We identify three channels through which EDGAR affects a firm’s cost of capital: the liquidity, risk-taking, and corporate governance channels. EDGAR implementation also improves a firm’s investment efficiency significantly. We find evidence that the marginal value of a firm’s capital investment and cash is higher during the post-EDGAR period.

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

JEL Classification: G30, G32, G34

Suggested Citation: Suggested Citation

Lai, Sandy and Lin, Chen and Ma, Xiaorong, Regtech Adoption and the Cost of Capital (August 24, 2020). Management Science Forthcoming, Available at SSRN: https://ssrn.com/abstract=3683046 or http://dx.doi.org/10.2139/ssrn.3683046