The Impact of Securities Regulation on New Keynesian Firms

68 Pages Posted: 16 Nov 2021 Last revised: 6 Jan 2022

See all articles by Erica X. N. Li

Erica X. N. Li

Cheung Kong Graduate School of Business

Jin Xie

Peking University HSBC Business School

Ji Zhang

Tsinghua University - PBC School of Finance

Date Written: November 15, 2021

Abstract

Borrowing firms resetting output prices infrequently are less able to insulate their profits from economic shocks, the impact of which on performance is costly for lenders to verify. If securities regulation is lenient, sticky-price firms might face greater financial frictions due to managerial misreporting. We document that S&P 500 firms with stickier prices paid lower loan spreads and provided collateral less often following the passage of Sarbanes-Oxley Act (SOX), and the results are robust to using staggered implementations of Section 404 to isolate the effects that were uniquely due to SOX. Firms with stickier prices are negatively associated with daily returns around the Enron scandal but positively associated with returns around the SEC's approval of the change in listing requirements. We develop a New Keynesian model of an economy in which firms feature differential output-price stickiness. The model mirrors both pre- and post-SOX scenarios and shows that when paying higher credit spreads, firms with stickier prices have lower debt capacity, are endogenously more volatile in equity returns, and display higher capital-investment and stock-price sensitivities to monetary policy shocks. Our further empirical analyses yield results that are in line with these model predictions.

Keywords: Nominal Rigidities, New Keynesian Models, Financial Friction, Sarbanes-Oxley Act, Information Disclosure

JEL Classification: D50, E12, E44, G28, G32, G33

Suggested Citation

Li, Erica X. N. and Xie, Jin and Zhang, Ji, The Impact of Securities Regulation on New Keynesian Firms (November 15, 2021). Available at SSRN: https://ssrn.com/abstract=3963813 or http://dx.doi.org/10.2139/ssrn.3963813

Erica X. N. Li

Cheung Kong Graduate School of Business ( email )

1 East ChangAn Avenue, Oriental Plaza, E2, 20/F
One East Chang An Avenue
Beijing, 100738
China

Jin Xie (Contact Author)

Peking University HSBC Business School ( email )

Ji Zhang

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

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