More on SOX costs
More on the costs of the misbegotten SOX - I did not mention this study by Zhang in my earlier post. The abstract reads:
"This paper investigates the economic consequences of the Sarbanes-Oxley Act through a study of market reactions to legislative events related to the Act. I find that the cumulative abnormal return around all legislative events leading to the passage of the Act is significantly negative. The loss in total market value around the most significant rulemaking events amounts to $1.4 trillion. I then examine the private benefits and costs of major provisions of the Act by investigating the cross-sectional variation in market reactions to the rulemaking events. Regression results are consistent with the hypothesis that shareholders consider both the restriction of nonaudit services and the provisions to enhance corporate governance costly to business. The results also show that Section 404 of SOX, which mandates an internal control test, imposes significant costs on firms."
It is likely that other contemporaneous news announcements may have impacted stock prices during the study, though the author shows that other news around the most significant SOX-related events is unlikely the key driver of the documented abnormal returns. Second, as investors’ expectations are unobservable, the author states that he cannot completely rule out an alternative hypothesis for the observed negative cumulative abnormal return, viz., that investors had expected really tough regulations but were disappointed by SOX. However, additional analyses in the paper do not provide support for this hypothesis.
Well, SOX doesn't seem to be hurting everyone. Didn't Greenspan recently tell Wharton graduates he "likes" it?
"This paper investigates the economic consequences of the Sarbanes-Oxley Act through a study of market reactions to legislative events related to the Act. I find that the cumulative abnormal return around all legislative events leading to the passage of the Act is significantly negative. The loss in total market value around the most significant rulemaking events amounts to $1.4 trillion. I then examine the private benefits and costs of major provisions of the Act by investigating the cross-sectional variation in market reactions to the rulemaking events. Regression results are consistent with the hypothesis that shareholders consider both the restriction of nonaudit services and the provisions to enhance corporate governance costly to business. The results also show that Section 404 of SOX, which mandates an internal control test, imposes significant costs on firms."
It is likely that other contemporaneous news announcements may have impacted stock prices during the study, though the author shows that other news around the most significant SOX-related events is unlikely the key driver of the documented abnormal returns. Second, as investors’ expectations are unobservable, the author states that he cannot completely rule out an alternative hypothesis for the observed negative cumulative abnormal return, viz., that investors had expected really tough regulations but were disappointed by SOX. However, additional analyses in the paper do not provide support for this hypothesis.
Well, SOX doesn't seem to be hurting everyone. Didn't Greenspan recently tell Wharton graduates he "likes" it?
posted by Deepa at
8:41 AM
