Delay as a Financing Friction: Evidence from the 2005 Securities Offering Reform

Abstract

We provide empirical evidence on how delay in raising outside capital affects firms’ financing decisions. We exploit the 2005 Security Offerings Reform as a quasi-natural experiment where for a subset of large US firms the regulatory delay (1-1.5 months) associated with raising public debt is eliminated. Difference-in-differences estimates suggest that financially constrained firms respond to reduced delay by switching 35%-45% of their debt issues from private to public markets, while we find no effect on unconstrained firms. We further show that a reduction in delay does not affect bond yields but is associated with the use of more debt covenants, implying a potential trade-off. Our empirical findings corroborate the importance of delay as a financial friction and support the SEC’s decision to enact the Reform in order to contain the growth of private placements.