Corporate Governance and Credit Access in Brazil: The Sarbanes‐Oxley Act as a Natural Experiment

Abstract

Manuscript Type Empirical Research Question/Issue This study seeks to examine the effect of changes in corporate governance levels on the choice of firms' debt financing in a relevant emerging economy, taking advantage of the Sarbanes‐Oxley Act as a natural experiment. Research Findings/Insights Our empirical method uses an experimental design in which we control for observed and unobserved firm heterogeneity via a difference‐in‐differences estimator. We show that firms subjected to this new regulation, which raised governance requirements, observed a positive effect on their access to the credit market, increasing their total debt significantly, via long‐term and private debt, and reducing the cost of debt, indicating that SOX produced economic gains in this aspect. Theoretical/Academic Implications The main contribution of the present paper is to measure the corporate governance effects on firms' debt financing policies, isolated from other contemporaneous events. Furthermore, we develop a simple theoretical model to help in the understanding of the main sources of SOX's effects. Finally, the natural experimental approach deals with the endogenous relation between corporate governance and firms' choices on debt financing, and presents an alternative to instrumental variables techniques. Practitioner/Policy Implications This paper offers insights to policymakers of emerging economies interested in the development of the credit market. Using laws and regulations like the Sarbanes‐Oxley Act, we show that it is possible to improve firms' governance, with a positive impact on firms' ability to access credit.

Endividamento e decisões contábeis: a relação não linear entre dívida e qualidade dos lucros

“…Entretanto, diversas características do mercado americano o diferenciam de mercados emergentes, como é o caso do mercado brasileiro. Em especial, o acesso ao mercado de capitais e os prazos para financiamentos de longo prazo (via dívidas e via debêntures), ambos muito menores e mais restritos no mercado brasileiro (Funchal & Monte-Mor, 2016). No caso do mercado de capitais, as empresas brasileiras possuem em média níveis de endividamento mais elevados do que as empresas americanas, o que tornaria os efeitos do endividamento no gerenciamento de resultados ainda mais relevantes.…”

“…Por se tratar de um resultado em um país emergente com acesso mais restrito ao mercado de capitais e com menores prazos de financiamento, pesquisas que envolvem qualidade da informação contábil ressaltam uma outra justificativa para a relevância do nível de endividamento (Funchal & Monte-Mor, 2016). Nesse caso, o nível de endividamento pode trazer informações associadas às decisões gerenciais de reportar lucros com maior ou menor qualidade, influenciando inclusive a previsão dos fluxos de caixa futuros (Smith, 1993;Ghosh & Moon, 2010).…”

Governance and Financing of Innovative Very Small Business (VSB): Evidence from a Canadian Biotechnological Firm

“…In fact, in this artisanal phase, corporate governance is not formalized which allows managers the freedom of action to demonstrate their competitive advantage (Hamdouch, 2002). In addition, this situation exposes the fi nancing problems encountered in company growth (Funchal & Monte-Mor, 2016). Th is learning on the job regarding questions of fi nancing acts as a sort of natural selection process for VSBs to determine who survives and who disappears.…”

“…3 (17), No. 1, 2017 in fi nancing the rapid growth of their organizations (Funchal & Monte-Mor, 2016;Edmans, Fang, & Zur, 2013). However, is it fair to say that VSBs have a specifi c type of governance compared to that of large companies?…”

Preventional Audit: Implementation of Sox Control to Prevent Fraud

“…Here also should be mentioned the principles of the effects of SOX. SOX requires a more careful filling of balance sheets and other financial statements (Funchal & Soares Monte-Mor, 2016). The effects of the SOX system occur in two ways (Saxton & Neely, 2019).…”