Costs of Complying with SOX - Measurement, Variation and Investors' Anticipation

58 Pages Posted: 30 Oct 2010 Last revised: 1 Nov 2010

See all articles by Michael W. Maher

Michael W. Maher

University of California, Davis - Graduate School of Management

Dan Weiss

Tel Aviv University - Coller School of Management

Date Written: October 29, 2010

Abstract

The debate about the costs of complying with the Sarbanes-Oxley Act of 2002 (SOX) continues. This paper contributes to the debate in several ways. First, in contrast to prior studies, this study presents a large sample documentation (1,493 firms per year over four years after SOX was enacted) of actual SOX compliance costs for accelerated SEC filers. Using a new measure of direct compliance costs, we document that the annual SOX compliance costs range, on average, from 0.29% to 0.62% of sales in each of the four years after SOX was enacted. The median dollar costs for the sample were $1.3 million, $2.3 million, $3.0 million and $1.8 million in each of the four years, respectively. Second, we found a large variation in compliance costs. Particularly, 23.2% of the accelerated filers in our sample had compliance costs of $91,000 per year or less, which is the amount of compliance cost predicted by the SEC during the legislative process. Moreover, our results indicate that firms which reported internal control deficiencies incurred significantly higher SOX compliance costs than did firms that did not report internal control deficiencies. Third, in view of this wide variation in compliance costs, we examined whether investors correctly anticipated which firms would incur the greatest compliance costs. Prior research has shown that investors discounted the value of the entire market of firms affected by SOX, but has not examined the variation in the impact of SOX on individual firms. Looking at investors’ pricing of stocks during the period leading up to the passage of SOX, we found that investors did, indeed, correctly anticipate which firms would bear the brunt of SOX compliance and which would not.

Keywords: SOX, Compliance Costs, Internal Controls

JEL Classification: K22, L51, M40

Suggested Citation

Maher, Michael W. and Weiss, Dan, Costs of Complying with SOX - Measurement, Variation and Investors' Anticipation (October 29, 2010). Available at SSRN: https://ssrn.com/abstract=1699828 or http://dx.doi.org/10.2139/ssrn.1699828

Michael W. Maher (Contact Author)

University of California, Davis - Graduate School of Management ( email )

One Shields Avenue
Davis, CA 95616
United States
530-752-7034 (Phone)
530-752-0723 (Fax)

Dan Weiss

Tel Aviv University - Coller School of Management ( email )

P.O. Box 39010
Ramat Aviv, Tel Aviv, 69978
Israel

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