What happens when small firms get special treatments from the SEC

What is it about?

Between 2003 and 2008, the SEC postponed compliance with Section 404 of the Sarbanes‐Oxley Act of 2002 (SOX) for “non‐accelerated filers” (firms with a public float less than $75 million). We examine the incentives of small firms to remain small.

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Why is it important?

We find that small firms remained small by undertaking less investment, making more cash payouts to shareholders, reducing the number of shares held by non‐affiliates, making more bad news disclosures, and reporting lower earnings than control firms. These findings have implications beyond SOX because numerous federal and state regulations exempt small firms via bright line size thresholds.