February 15, 2005
Benefits of SOX?
Posted by Brett McDonnell

Corporate lawyers, directors, and scholars sympathetic to those groups have made much of the costs of the Sarbanes-Oxley Act, which do indeed seem fairly high. Is there any evidence of benefits from the Act? The Act is of course still new, some major provisions are not yet fully implemented, and many possible benefits are rather diffuse and hard to measure. Still, is there anything out there? I did a search on ssrn for the keyword Sarbanes, and found a few papers that have at least some preliminary evidence. Warning: I have not read these in any detail, and I cannot vouch for their quality, but still, they seem to be worth considering.

One paper looks at earnings management and finds that it has decreased. However, earnings have not necessarily become more informative. Several papers (here and here) find evidence of a positive reaction by securities markets to passage of the Act and related events. Another paper finds that the Act has improved liquidity. Finally, one paper finds evidence that SOX has increased auditor independence.

I have also written two papers (here and here) on SOX. I have not done systematic empirical work, but rather considered the process by which SOX was passed and implemented, and how other regulators and companies seem to be reacting. I am not that impressed with the content of the Act itself--it is quite scattershot, and many provisions seem to be more for show than real effect. However, I think the fact of the Act's existence is still having a strong, and on the whole probably good, effect in two ways. First, regulators besides Congress, notably the SEC, the securities exchanges, and the Delaware courts, have been prodded to more actively oversee officer and board behavior. Second, I suspect that directors and officers are taking their duties to the corporation more seriously. In part this is due to an over-reaction to what is probably a rather small increase in the risk of being held personally liable. In part it is due to the Act and related events helping to extend and strengthen an emerging norm of active, independent board monitoring.

Thus, I suspect that on the whole SOX will turn out to be a net positive, although the quality of the evidence is inevitably such that I'm sure scholars will be squabbling over this until something more interesting comes along.

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