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

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