Regulatory Costs of Being Public: Evidence from Bunching Estimation

Abstract

Many disclosure and internal governance regulations for U.S. public firms trigger when a firm's public float exceeds a threshold. Consistent with firms seeking to avoid costly regulation, we document significant bunching around multiple regulatory thresholds introduced from 1992 to 2012. We present a revealed preference estimation strategy that uses this behavior to quantify regulatory costs. Our estimates show that various disclosure and internal governance rules leads to a total compliance cost of 4.3% of the market capitalization for a median U.S. public firm. We apply the estimated costs to firms' public-private choice and show that regulatory costs significantly impact private firms' decisions to go public, while have limited effects on public firms' decisions to go private.

Keywords: costs of being public, bunching estimator, capital market regulation, disclosure, governance

JEL Classification: G21, G28