Persistent Costs of Disclosure Exemption Regulation

Abstract

This paper investigates the long-term costs of size-based disclosure exemption regulation. Prior literature documents that companies react to exemption thresholds by sacrificing resources to actively lower their size and avoid compliance of reporting requirements. Exploiting the Smaller Reporting Companies’ (SRCs) threshold update in 2018, I examine whether the investment-sacrificing behavior of companies is timely reversed once the SRC threshold is lifted. I hypothesize and find evidence that size manipulation is not reversed until at least two years after the SRC threshold update, imposing persistent costs on smaller companies that have been previously overlooked by the literature. As such, the effects of a size-based threshold may not be trivially undone, adding another layer of complexity to size-based regulatory interventions.