In my Corporate Governance Colloquium this week, we discussed Eric Talley?s paper Going-Private Decisions and the Sarbanes-Oxley Act of 2002: A Cross-Country Analysis:
Abstract: This article investigates whether the regulatory regime created by the Sarbanes- Oxley Act of 2002 (SOX) has driven firms in general, and small firms in particular, out of the public capital market. Previous attempts to address this question have had difficulty controlling for other factors that could have affected exit decisions around the enactment of SOX. To address this difficulty, we examine the post-SOX change in the propensity of public American target firms to be bought by private acquirers rather than public ones with the corresponding change for foreign target firms, which were outside the purview of SOX. Our findings are consistent with the hypothesis that SOX induced small firms to exit the public capital market during the first year of its enactment. Large firms, by contrast, do not appear to have been affected.
As we discussed in the seminar, there is a real problem identifying and quantifying the benefits of SOX. Observing how economic actors behave - how they vote with their pocketbook - is one solution to that problem. Talley's article is consistent with other data points suggesting that economic actors perceive SOX's costs as exceeding its benefits. (For blogospheric discussion of the Talley article see Vic Fleicher and Larry Ribstein's posts.)
On our Colloquium blog today, one of my students pointed the class to today?s Wall Street Journal article, ?Tougher Venture: IPO Obstacles Hinder Start- Ups? (page C1), which addresses an effect of SOX that Talley did not examine: the reduction in ?going public? rates. The article reports that 41 venture-backed start ups went public in 2005, down from 67 in 2004. ?Small companies considering going public also must contend with new auditing and reporting requirements, including the 2002 Sarbanes- Oxley law. The law makes it more expensive to be a public company, requires top executives to vouch for the accuracy of their books and includes stiff penalties for violations, all of which makes start-ups think twice about going public, small-company executives and venture capitalists say.? The Wall Street Journal article does not isolate the effect of SOX, and also discusses other regulatory obstacles to going public. However, it could add to the existing evidence of the costs of SOX.
