Relevance of the SEC’s Regulatory Oversight in Private Debt Contracting

We examine the causal effect of increased oversight by the U.S. Securities and Exchange Commission (SEC) on the cost of bank loans issued to U.S. cross-listed foreign firms, using the signing of the Multilateral Memorandum of Understanding (MMoU) as a natural experiment. The MMoU enables the SEC to take stricter punitive actions against wealth expropriation by cross-listed firms’ insiders and enforce better compliance with applicable reporting and disclosure standards. We find that the U.S. cross-listed foreign firms pay significantly lower interest spreads on their bank loans following the implementation of the MMoU, consistent with banks valuing the SEC’s cross-monitoring of borrowers. In cross-sectional analyses, we find that the effect is more pronounced for borrowers from countries with weaker institutions and for loans arranged by top lenders, and it is less pronounced when the SEC faces greater budgetary constraints. Our findings suggest that while the SEC’s primary mandate is to protect public equity and bond investors, the benefits of its supervision extend to private debt markets as well