The Sarbanes-Oxley Act and Firms' Going-Private Decisions

Abstract

We investigate firms' going-private decisions in response to the passage of the Sarbanes-Oxley Act of 2002 (SOX). The Act has the potential to bring both benefits, in terms of more transparent disclosure and improvements in corporate governance, and costs, in terms of complying with the new regulation. We argue that firms go private in response to SOX only if the SOX-imposed costs to the firm exceed the SOX-induced benefits to shareholders, and this difference swamps the net benefit of being a public firm prior to the passage of SOX. By examining a sample of all going-private firms from 1998 to 2004, we find: (1) the quarterly frequency of going private has modestly increased after the passage of SOX; (2) the abnormal returns associated with the passage of SOX were positively related to firm size and share turnover; (3) smaller firms and firms with greater inside ownership have experienced higher going-private announcement returns in the post-SOX period compared to the pre-SOX period. Our empirical evidence is broadly consistent with the notion that SOX has affected firms' going-private decisions.

Keywords: Corporate governance, Sarbanes-Oxley Act, Going-private transactions

JEL Classification: G38, G34, M41