How Costly is the Sarbanes Oxley Act? Evidence on the Effects of the Act on Corporate Profitability

47 Pages Posted: 29 Sep 2009  

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

Date Written: September 2009

Abstract

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.

Keywords: Sarbanes Oxley Act, Operating profitability, Net realized costs, Cost of compliance, Small firms

JEL Classification: G18, G38, K22

Suggested Citation

Ahmed, Anwer S. and McAnally, Mary Lea and Rasmussen, Stephanie J. and Weaver, Connie D., How Costly is the Sarbanes Oxley Act? Evidence on the Effects of the Act on Corporate Profitability (September 2009). Available at SSRN: https://ssrn.com/abstract=1480394 or http://dx.doi.org/10.2139/ssrn.1480394

Anwer S. Ahmed

Texas A&M University - Mays Business School ( email )

430 Wehner
College Station, TX 77843-4353
United States

Mary Lea McAnally

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States
979-845-5017 (Phone)
979-845-0014 (Fax)

Stephanie J. Rasmussen (Contact Author)

University of Texas at Arlington ( email )

Box 19468
Arlington, TX 76019-0468
United States

Connie D. Weaver

Texas A&M University ( email )

430 Wehner
College Station, TX 77843-4353
United States

Paper statistics

Downloads
708
Rank
27,865
Abstract Views
3,350