IPO Regulation and Initial Capital Structure: Evidence from the JOBS Act

Abstract

We examine capital structure implications of newly public firms' availing themselves of regulatory exemptions. Title I of the Jumpstart Our Business Startups (JOBS) Act provides newly public firms broad-scale regulatory relief but limits the benefits to a certain subset of firms named Emerging Growth Companies (EGCs). One of the EGC criteria is based on a $700 million public float threshold. We find evidence that firms appear to bunch up their public float at IPO issuances below the $700 million threshold and repurchase their shares after the issuances to be eligible for the EGC status. Firms staying below the threshold are more likely to substitute public equity with debt. We further find that the leverage effect persists over time (the leverage ratchet effect) even when EGCs lose their status.