Does the JOBS Act Reduce Compliance Costs of Emerging Growth Companies? Theory and Evidence

Abstract

SUMMARY In April 2012, the Jumpstart Our Business Startups (JOBS) Act was enacted to revitalize the initial public offering market by reducing regulatory burdens for small firms. We focus on audit fees, one directly observable and significant cost of complying with the JOBS Act. Specifically, we examine whether the exemption of emerging growth companies (EGCs) from SOX 404(b) auditor attestations of internal control over financial reporting and other disclosure requirements affected audit fees paid by EGCs. We find that EGCs paid higher audit fees than non-EGCs after IPOs. Moreover, we find that the positive relation between EGCs and audit fees is more pronounced for firms with high financial reporting risk. Collectively, our results reveal an unintended consequence of the JOBS Act: it failed to reduce audit fees, a major component of the compliance costs of EGCs.