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

See all articles by Mahfuz Chy

Mahfuz Chy

University of Missouri at Columbia - Robert J. Trulaske, Sr. College of Business

Inder K. Khurana

University of Missouri at Columbia - Robert J. Trulaske, Sr. College of Business

Hoyoun Kyung

University of Missouri at Columbia - Robert J. Trulaske, Sr. College of Business

Date Written: March 3, 2023

Abstract

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

Chy, Mahfuz and Khurana, Inder and Kyung, Hoyoun, Spillover Effects of the SEC’s Regulatory Oversight on Private Debt Contracting: Evidence from Cross-listed Foreign Firms (March 3, 2023). Available at SSRN: https://ssrn.com/abstract=4194083 or http://dx.doi.org/10.2139/ssrn.4194083

Mahfuz Chy

University of Missouri at Columbia - Robert J. Trulaske, Sr. College of Business ( email )

331 Cornell Hall
Columbia, MO 65211
United States

Inder Khurana

University of Missouri at Columbia - Robert J. Trulaske, Sr. College of Business ( email )

331 Cornell Hall
Columbia, MO 65211
United States
573-882-3474 (Phone)
573-882-2437 (Fax)

Hoyoun Kyung (Contact Author)

University of Missouri at Columbia - Robert J. Trulaske, Sr. College of Business ( email )

344 Cornell Hall
Columbia, MO 65211
United States

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