The Costs of SOX

19 June 2007 at 12:15 am Peter G. Klein 1 comment

| Peter Klein |

“Sarbanes-Oxley and Corporate Risk-Taking” by Leonce Bargeron, Kenneth Lehn, and Chad Zutter:

Many policymakers and corporate executives have argued that the Sarbanes-Oxley Act of 2002 (“SOX”) has had a chilling effect on the risktaking behavior of U.S. corporations. This paper empirically examines this proposition. Using a large sample of U.S. and U.K. companies, we find that compared with their U.K. counterparts U.S. firms have significantly reduced their R&D and capital expenditures and significantly increased their cash holdings since SOX. We also find that the equity of U.S. companies has become significantly less risky vis-à-vis U.K. companies since SOX. Finally, using a large sample of U.S. and U.K. initial public offerings (“IPOs”), we find that the likelihood that an IPO was conducted in the U.K. increased significantly after SOX and that this effect was especially high for firms in high R&D industries. Taken together, the results support the view that SOX has had a chilling effect on risk-taking by publicly traded U.S. corporations.

Lehn is a former chief economist at the US Securities and Exchange Commission, a founding editor (along with my former colleagues Jeff Netter and Annette Poulsen) of the Journal of Corporate Finance, and former director of CORI‘s predecessor organization CRCSE (Center for Resarch on Contracts and the Structure of Enterprise).

Here is a nice critique of SOX within a broader regulatory perspective. And check out the Mises Institute’s anti-SOX archive.

Entry filed under: - Klein -, Strategic Management, Theory of the Firm.

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1 Comment Add your own

1. spostrel | 21 June 2007 at 5:05 pm

The relative public silence on this topic by the accounting and finance professoriate is really stunning. We have decades of accounting research that says that financial markets are generally not fooled by accounting manipulations (admittedly fraud is different) and plenty of a priori reasons for thinking that competition for capital would lead firms (and stock exchanges) to adopt reasonable governance mechanisms. Yet pitchforks-and-torches exercises like SOX go through almost without any academic objection.