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

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.