To Comply or Not to Comply: Understanding the Discretion in Reporting Public Float and SEC Regulations

Abstract

This paper documents how firms exercise discretion in defining affiliates and reporting public float in response to Securities and Exchange Commission regulations. I find that firms with higher expected compliance costs under section 404 of the Sarbanes-Oxley Act of 2002 tend to classify more shares as affiliated and report lower public float. In contrast, firms issuing seasoned equity are less likely to underreport public float, possibly due to favorable regulatory treatment for large issuers. These incentives are weakened when future regulatory changes render float less important.Se conformer ou non : comprendre la latitude dont jouissent les soci et es dans la pr esentation de l'information relative au flottant dans le cadre des r eglements de la SEC R ESUM E L'auteure d ecrit comment les soci et es exercent leur pouvoir discr etionnaire dans la d efinition d'affili es et la pr esentation de l'information relative au flottant, dans le cadre de la r eglementation de la Securities and Exchange Commission. Elle constate que les soci et es dont les coûts d'observation pr evus sont plus elev es sous le r egime de l'article 404 de la Loi Sarbanes-Oxley de 2002 ont tendance a classer davantage d'actions comme etant celles d'affili es et a faire etat d'un flottant moins elev e. Par contre, les soci et es qui emettent des titres acclimat es sont moins susceptibles de pr esenter un flottant sous-evalu e, peut-être en raison du traitement r eglementaire favorable dont b en eficient les emetteurs importants. Le pouvoir de ces incitatifs s'att enue lorsque les modifications ult erieurement apport ees a la r eglementation diminuent l'importance du flottant.

Estimating the Compliance Costs of Securities Regulation: A Bunching Analysis of Sarbanes-Oxley Section 404(b)

“…Until 2007, firms wishing to undertake seasoned equity offerings (SEOs) were permitted to use a simplified form (Form S-3) only if they had public float exceeding $75 million (e.g. Gao, 2016). This creates an incentive for firms undertaking SEOs to bunch above the $75 million threshold, and leads to a potential bias against the results we find.…”

“…The likelihood of firms remaining below the threshold is positively related to a measure of CEO power and negatively related to measures of monitoring, such as being audited by a major accounting firm. Gao (2016) explores in more detail how firms use their discretion in reporting public float, using a sample of 716 firms that had market capitalization between $75 million and $150 million over 2003-2006. Financial and ownership data for these firms is used to construct a benchmark public float, which is then compared to the reported public float (hand-collected from the SEC filings).…”

“…Financial and ownership data for these firms is used to construct a benchmark public float, which is then compared to the reported public float (hand-collected from the SEC filings). Gao (2016) finds that firms that are predicted to face higher SOX 404 compliance costs count more shares as being "affiliated" in order to report a lower public float.…”

“…). In reality, there may be other mechanisms to achieve this aim, such as disclosures that reduce stock price or reclassification of the insider status of blockholders (Gao, Wu and Zimmerman, 2009;Nondorf, Singer and You, 2012;Gao, 2016). The focus here on the potential manipulation of is purely illustrative; the empirical analysis does not hinge on this 21 Suppose that we define more generally as:…”

“…As discussed in the prior literature, firms have available a variety of mechanisms through which public float might potentially be "managed," such as insider purchases of stock or disclosures that reduce stock price (Gao, Wu and Zimmerman, 2009;Nondorf, Singer and You, 2012;Gao, 2016). Of course, each of these strategies entails some type of cost.…”