The Sarbanes-Oxley Act and the Making of Quack Corporate Governance
Yale Law School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)
September 25, 2004
NYU, Law and Econ Research Paper 04-032; Yale Law & Econ Research Paper 297; Yale ICF Working Paper 04-37; ECGI - Finance Working Paper 52/2004
This paper provides an evaluation of the substantive corporate governance mandates of the Sarbanes-Oxley Act of 2002 that is informed by the relevant empirical accounting and finance literature and the political dynamics that produced the mandates. The empirical literature provides a metric for evaluating the mandates' effectiveness, by facilitating identification of whether specific provisions can be most accurately characterized as efficacious reforms or as quack corporate governance. The learning of the literature, which was available when Congress was legislating, is that SOX's corporate governance provisions were ill-conceived. The political environment explains why Congress would enact legislation with such mismatched means and ends. SOX was enacted as emergency legislation amidst a free-falling stock market and media frenzy over corporate scandals shortly before the midterm congressional elections. The governance provisions, included toward the end of the legislative process in the Senate, were not a focus of any considered attention. Their inclusion stemmed from the interaction between election year politics and the Senate banking committee chairman's response to suggestions of policy entrepreneurs. The scholarly literature at odds with those individuals' recommendations was ignored, while the interest groups whose position was more consistent with the literature - the business community and accounting profession - had lost their credibility and become politically radioactive. The paper's conclusion is that SOX's corporate governance provisions should be stripped of their mandatory force and rendered optional. Other nations, such as the members of the European Union who have been revising their corporation codes, would be well advised to avoid Congress' policy blunder.
Number of Pages in PDF File: 234
Keywords: corporate governance, corporate law, securities regulation, Sarbanes-Oxley Act
JEL Classification: K22, G34
Date posted: September 27, 2004
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