Financial Reporting Regulation and Financing Decisions

We study the influence of a major reform in financial reporting regulation on financing decisions. Across a battery of tests, we document an increase in the issuance of external financing around the new regime. Further, firms make different financing decisions around the new regulation depending on their ex-ante debt capacity, allowing them to adjust their capital structure. Our results are accentuated across firms facing higher adverse selection costs and are consistent with the new regulation reducing underinvestment among constrained firms. Our findings highlight the importance of financial reporting regulation in explaining financing as well as investment policies, and provide insights into which firms are more likely to benefit from it. Current draft: April 2017 _______________ * Corresponding author contact information: 100 Main Street, Cambridge, MA 02142; Phone: (617) 253-2956; Email: [email protected]. We thank Manuel Adelino, Joshua Anderson, Mark Bradshaw, John Core, Xavier Giroud, João Granja, Nick Guest, Michelle Hanlon, Amy Hutton, Christian Leuz, Gustavo Manso, Stewart Myers, Jeff Ng, Scott Richardson, Michael Roberts, Antoinette Schoar, Nemit Shroff, Eric So, Jerry Zimmerman, and workshop participants at University of Arizona, Boston College, University of British Columbia, Catholic-Lisbon University, INSEAD, LBS, MIT, Penn State, Rice University, the University of Sao Paulo, and conference participants at the AAA, EAA and IAS for helpful comments. The authors gratefully acknowledge financial support from the MIT Sloan School of Management, Rice University and UCLA. Patricia Naranjo and Daniel Saavedra are also grateful for financial support from the Deloitte Foundation.