Examining the Decision to Opt In versus Opt Out of Section 107 of the JOBS Act of 2012: Determinants and Consequences

The Jumpstart Our Business Startups Act of 2012 (hereafter, JOBS Act) creates a new category of firms, referred to as “Emerging Growth Companies” (hereafter, EGCs). Section 107 of the JOBS Act, titled “Opt-In Right for EGCs,” gives EGCs the choice to take advantage of an extended transition period for complying with new or revised accounting standards. In other words, an EGC can choose to delay the adoption of new or revised accounting standards until those standards would otherwise apply to private companies. Using a logistic regression approach with hand-collected data, we examine the underlying firm characteristics associated with EGCs’ choice of opting in or out of the accounting standards exemption, as provided by Section 107 of the JOBS Act. Using additional ordinary least square regression analyses, we further examine whether the choice of opting in or out is associated with earnings management and financial statement restatement behavior. Our results suggest that EGC firms designated as “smaller reporting companies” are more likely to choose to delay the adoption of a new or revised accounting standard (i.e., opt in). Our findings also show that EGCs that employ Big 4 auditors are more likely to opt out. We further find that EGCs that choose to opt out are less likely to engage in earnings management behavior, proxied by the absolute value of abnormal accruals, and are less likely to restate their financial statements. Taken together, our findings suggest that EGCs that choose to opt out of Section 107 produce higher quality financial statements.