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The Sarbanes-Oxley Act and Exit Strategies of Private Firms

43 Pages Posted: 24 Dec 2010 Last revised: 12 Jan 2014

Francesco Bova

University of Toronto - Rotman School of Management

Miguel Minutti-Meza

University of Miami - School of Business Administration

Gordon D. Richardson

University of Toronto - Rotman School of Management

Dushyantkumar Vyas

University of Toronto - Rotman School of Management; University of Toronto at Mississauga

Date Written: January 21, 2011

Abstract

The costs and benefits of the Sarbanes-Oxley Act of 2002 (SOX) have been oft-debated since the inception of the Act. Much of the extant literature has assessed the costs and benefits of SOX to publicly-traded companies. We focus on the costs of SOX compliance for private firms wanting to exit the private market via either an acquisition by a public firm or an IPO. Consistent with our predictions we establish three principal findings. First, SOX appears to have shifted the incentive for firms to exit the private market via IPO to exit via acquisition by a public acquirer. Second, private target deal multiples are increasing in variables that proxy for a private target’s level of pre-acquisition SOX compliance. For our median-sized private target, the estimated dollar value decrease in deal proceeds when one moves from a high level to a low level of pre-acquisition SOX compliance is $1.3 million. Finally, public target deal multiples are not affected by a public target’s level of pre-acquisition SOX compliance. These findings suggest that SOX-related costs have both restricted the action space of possible exit strategies for private firms and led to lower deal multiples for those private acquisition targets that are less likely to be SOX compliant prior to acquisition. We believe that the implications from our tests will be relevant to regulators in the U.S. and many countries outside the U.S. that are attempting to improve their country’s governance and listing standards and potentially seeking alternatives to SOX-like standards, especially with respect to internal controls. International regulators need to assess the total costs of SOX, including costs imposed on private company shareholders, when contemplating the net benefits of SOX-like regimes.

Keywords: Sarbanes-Oxley, SOX, M&A, IPO, Private Firms

JEL Classification: G30

Suggested Citation

Bova, Francesco and Minutti-Meza, Miguel and Richardson, Gordon D. and Vyas, Dushyantkumar, The Sarbanes-Oxley Act and Exit Strategies of Private Firms (January 21, 2011). Contemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1730242 or http://dx.doi.org/10.2139/ssrn.1730242

Francesco Bova (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-978-3985 (Phone)

Miguel Minutti-Meza

University of Miami - School of Business Administration ( email )

P.O. Box 248126
Florida
Coral Gables, FL 33124
United States
305-284-6287 (Phone)

Gordon D. Richardson

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-946-8601 (Phone)
416-971-3048 (Fax)

Dushyantkumar Vyas

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

University of Toronto at Mississauga ( email )

3359 Mississauga Rd N.
Mississauga, Ontario L5L 1C6
Canada

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