Was the Sarbanes-Oxley Act of 2002 Really this Costly? A Discussion of Evidence from Event Returns and Going-Private Decisions
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Center for Financial Studies (CFS); University of Pennsylvania - Wharton Financial Institutions Center; CESifo Research Network
Journal of Accounting & Economics (JAE), Vol. 44, 2007
This paper discusses empirical evidence on the costs (and benefits) of the Sarbanes-Oxley Act (SOX), particularly from stock returns and firms' going-private decisions. Zhang (2006) analyzes stock returns around key legislative events and concludes that SOX and its provisions have imposed significant net costs on firms. Engel et al. (2006) examine going-private decisions before and after SOX and point to unintended consequences of SOX. Both studies are carefully conducted and deserve praise for tackling a timely and important issue. However, as my discussion and its evidence highlight, several of the key findings may not be attributable to SOX. Instead, they may reflect broader market trends. Thus, we need to exercise caution in interpreting the existing evidence. While it is not implausible that one-size-fits-all regulation imposes significant costs on firms, we presently do not have much SOX-related evidence supporting this conclusion. In fact, there is a growing body of evidence (which I review) that SOX has increased the scrutiny on firms and has produced certain benefits. The net effects on firms or the U.S. economy, however, remain unclear.
Number of Pages in PDF File: 33
Keywords: Securities regulation, Event study, Disclosure, Corporate governance, Cost-benefit analysis, Stock returns, Going private, Going dark
JEL Classification: G14, G15, G38, G30, K22, M41Accepted Paper Series
Date posted: June 3, 2007
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