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Regulatory costs of being public: Evidence from bunching estimation

Author

Listed:
  • Ewens, Michael
  • Xiao, Kairong
  • Xu, Ting

Abstract

We quantify the costs of major disclosure and governance regulations by exploiting a regulatory quirk: many rules trigger when a firm's public float exceeds a threshold. Consistent with firms avoiding costly regulation, we document significant bunching around three major regulatory thresholds. Estimations reveal that the three examined rules' compliance costs range from 1.2% to 1.8% of market capitalization for firms near thresholds. For a median U.S. public company, total costs amount to 4.3% of market capitalization, and at least 2.3% absent regulatory avoidance frictions. These cost estimates are robust across various extrapolation assumptions, ranging from 2.1% to 6.3% of market capitalization. Regulatory costs have a greater impact on private firms' IPO decisions than on public firms' going private decisions, but such costs only explain a small part of the decline in the number of public firms.

Suggested Citation

  • Ewens, Michael & Xiao, Kairong & Xu, Ting, 2024. "Regulatory costs of being public: Evidence from bunching estimation," Journal of Financial Economics, Elsevier, vol. 153(C).
    • Handle: RePEc:eee:jfinec:v:153:y:2024:i:c:s0304405x23002155
    DOI: 10.1016/j.jfineco.2023.103775
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    More about this item

    Keywords

    Costs of being public; Bunching estimator; Capital market regulation; Disappearing public firms;
    All these keywords.

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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