Spillover Effects of the SEC’s Regulatory Oversight on Private Debt Contracting: Evidence from Cross-listed Foreign Firms
58 Pages Posted: 26 Aug 2022 Last revised: 6 Mar 2023
Date Written: March 3, 2023
We examine the effect of the SEC’s regulatory oversight on private debt contracting outcomes, using the signing of the Multilateral Memorandum of Understanding (MMoU) as a natural experiment. The MMoU enables the SEC to take stricter punitive actions against wealth expropriation by cross-listed firms’ insiders and enforce better compliance with applicable rules and regulations. We find that enhanced SEC oversight in the post-MMoU regime lowers loan spreads by 36 basis points, thus saving an average cross-listed firm approximately $9 million in direct loan costs over the life of a bank loan. Cross-sectional analyses show that the effect is more pronounced for borrowers from countries with weaker institutions, borrowers with greater accounting discretion, and for loans arranged by top lenders, and it is less pronounced when the SEC faces greater budgetary constraints. Enhanced SEC oversight also leads to an increase in loan maturity and a decrease in financial covenants. Our evidence suggests that while the SEC’s primary mandate is to protect public equity and bond investors, its supervision yields substantial borrowing cost savings and more lenient non-price loan terms in the private debt markets as well.
Keywords: SEC oversight, Multilateral Memorandum of Understanding, bank monitoring, bank loans, debt contracting, cost of debt
JEL Classification: G18, G21, M40, M41, M48
Suggested Citation: Suggested Citation