How Costly is the Sarbanes Oxley Act? Evidence on the Effects of the Act on Corporate Profitability
Anwer S. Ahmed
Texas A&M University - Mays Business School
Mary Lea McAnally
Texas A&M University - Department of Accounting
Stephanie J. Rasmussen
University of Texas at Arlington
Connie D. Weaver
Texas A&M University
The Sarbanes-Oxley Act (SOX) was intended to protect investors by improving the accuracy and reliability of corporate disclosures. However, critics have argued that the costs of SOX far outweigh its intended benefits. Prior studies based on stock-price reactions to SOX-related events document mixed evidence on the expected impact of SOX. In contrast, we provide evidence on the impact of SOX on operating profitability by examining the net realized costs of SOX. We find that average cash flows decline by 1.3 percent of total assets after SOX. These costs are more significant for smaller firms, for more complex firms, and for firms with lower growth opportunities. Annually, these costs range from $6 million for smaller firms to $39 million for larger firms. Further, we document that net SOX-related costs are not limited to one-time expenses associated with internal control design and implementation. In aggregate, for the 1,428 firms in our sample, these costs exceed $19 billion per year or about $75 billion over the four-year post-SOX study period. Profitability is lower for up to four years post-SOX. To our knowledge, ours are the first estimates of the realized net costs imposed by SOX.
Number of Pages in PDF File: 47
Keywords: Sarbanes Oxley Act, Operating profitability, Net realized costs, Cost of compliance, Small firms
JEL Classification: G18, G38, K22
Date posted: September 29, 2009
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