The Disclosure Cost of SEC Registration and Market Unraveling: Evidence from Rule 144A and Yankee Bond Issues

Abstract

I examine the consequences of SEC disclosure regulation in the U.S. market for foreign bonds, where firms can choose to register their issues with the SEC, known as “Yankee" bonds, or avoid registration using SEC Rule 144A. I use a recent rule change that allows firms to use IFRS financial statements without reconciliation to U.S. GAAP as an exogenous reduction in the disclosure costs of registration, and find that foreign firms are more likely to register their bond issues with the SEC after the change. More importantly, I find that investors react more negatively to Rule 144A placements following the rule change, as evidenced by higher cost of debt and lower credit ratings. The results reconcile to theoretical predictions from the Unraveling Hypothesis about how both firms and investors react to a decrease in disclosure costs. The study contributes to our understanding of how disclosure regulation affects foreign firm financing decisions in the United States, in particular the decision to register with the SEC.