The Sarbanes-Oxley Act and the Making of Quack Corporate Governance
European Corporate Governance Institute (ECGI) - Finance Working Paper No. 52/2004
NYU Law and Economics Research Paper No. 04-032
Yale ICF Working Paper No. 04-37
240 Pages Posted: 27 Sep 2004 Last revised: 16 Nov 2018
Date Written: September 25, 2004
Abstract
This paper provides an evaluation of the substantive corporate governance mandates of the Sarbanes-Oxley Act of 2002 that is informed by the relevant empirical accounting and finance literature and the political dynamics that produced the mandates. The empirical literature provides a metric for evaluating the mandates' effectiveness, by facilitating identification of whether specific provisions can be most accurately characterized as efficacious reforms or as quack corporate governance. The learning of the literature, which was available when Congress was legislating, is that SOX's corporate governance provisions were ill-conceived. The political environment explains why Congress would enact legislation with such mismatched means and ends. SOX was enacted as emergency legislation amidst a free-falling stock market and media frenzy over corporate scandals shortly before the midterm congressional elections. The governance provisions, included toward the end of the legislative process in the Senate, were not a focus of any considered attention. Their inclusion stemmed from the interaction between election year politics and the Senate banking committee chairman's response to suggestions of policy entrepreneurs. The scholarly literature at odds with those individuals' recommendations was ignored, while the interest groups whose position was more consistent with the literature - the business community and accounting profession - had lost their credibility and become politically radioactive. The paper's conclusion is that SOX's corporate governance provisions should be stripped of their mandatory force and rendered optional. Other nations, such as the members of the European Union who have been revising their corporation codes, would be well advised to avoid Congress' policy blunder.
Keywords: corporate governance, corporate law, securities regulation, Sarbanes-Oxley Act
JEL Classification: K22, G34
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Economic Consequences of the Sarbanes-Oxley Act of 2002
By Ivy Zhang
-
Corporate Governance and Firm Value: the Impact of the 2002 Governance Rules
-
Market Reaction to Events Surrounding the Sarbanes-Oxley Act of 2002 and Earnings Management
By Haidan Li, Morton Pincus, ...
-
Why Do Firms Go Dark? Causes and Economic Consequences of Voluntary SEC Deregistrations
By Christian Leuz, Alexander J. Triantis, ...
-
The Sarbanes-Oxley Act and Firms' Going-Private Decisions
By Ellen Engel, Rachel M. Hayes, ...
-
The Sarbanes-Oxley Act of 2002 and Security Market Behavior: Early Evidence
By Zabihollah Rezaee and Pankaj K. Jain
-
The Effect of the Sarbanes-Oxley Act on Non-US Companies Cross-Listed in the US
By Kate Litvak