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Firm opacity and the opportunity cost of cash

Felipe Cortes

Journal of Corporate Finance, 2021, vol. 68, issue C

Abstract: This paper studies the causal effect of a reduction in firm opacity on asset liquidity and corporate expenditures. We employ the discontinuous requirement of financial reporting introduced by the Sarbanes-Oxley Act, Section 404, as a measure of the change in the firm's information environment. Using a regression discontinuity design, we show that firms that comply with Section 404 exhibit higher stock liquidity and increased access to external financing compared to observationally similar firms. Furthermore, compliant firms hold less liquid assets and exhibit higher R&D expenditures relative to noncompliant firms. This difference sheds light on the impact of SOX 404 on firm opacity and the magnitude of the opportunity costs of holding cash.

Keywords: Cash holdings; Information asymmetries; Regression discontinuity; SOX 404; Opportunity cost (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:68:y:2021:i:c:s0929119921000444

DOI: 10.1016/j.jcorpfin.2021.101923

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