Expecting The Unexpected

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Unintended Consequences of Granting Small Firms Exemptions from Securities Regulation



That’s the diplomatic title of a new paper by Feng Gao, Joanna Shuang Wu, and Jerold Zimmerman at the Simon School of Business Administration at the University of Rochester.  It was blogged on over at the Harvard Law School Corporate Governance Blog and is available for download.
“The paper discusses what the authors believe to be two non-mutually exclusive reasons can motivate managers to retain their firm’s non-accelerated filer status: (i) they believe that complying with Section 404 reduces shareholder value, and/or (ii) they believe that Section 404 reduces their private control benefits. The paper does not differentiate between these two motives. Rather, it documents that regulatory size thresholds in fact induce some firms to remain below the threshold and identifies the various methods used to accomplish this objective. “

My comment on the post is below. More info can be found on the Harvard Law School Corporate Governance Blog.

This paper is fascinating and I will blog about it this week. It should come as no surprise to anyone that “owners” of smaller public companies would actively try to stay under the limit for Sarbanes-Oxley and would actively lobby for the regulations to be delayed, delayed, and repealed.

I call them “owners” because these companies are usually closely held and controlled by a few folks who only take advantage of the capital raising, exit strategy, and prestige aspects of being a public company without accepting the responsibilility of true public ownership. In fact, the same reason was given by many companies, many very large, who reverted to being private rather than comply with Sarbanes-Oxley.

So the real question is: If cost is not the issue, as a small company well managed and well audited should have no trouble complying, then what is the real reason? These small “public” companies are often not well managed or transparent as measured by the standards of much larger public companies. I wrote about this back in December of 2006.


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