Regulatory Costs of Being Public: Evidence from Bunching Estimation
93 Pages Posted: 11 Feb 2021 Last revised: 22 Dec 2023
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Regulatory Costs of Being Public: Evidence from Bunching Estimation
Regulatory Costs of Being Public: Evidence from Bunching Estimation
Date Written: December 19, 2023
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.
Keywords: costs of being public, bunching estimator, capital market regulation, disclosure, governance
JEL Classification: G21, G28
Suggested Citation: Suggested Citation