I had the pleasure of seeing Eric Talley present yesterday at UCLA's Corporate Governance Colloquium, which Steve Bainbridge is organizing.  (The paper is not on SSRN but can be viewed on the UCLA colloquium page linked above.) 

The paper (with Ehud Kumar and Pinar Kunaca-Mandic) compares rates of going private before and after Sarbanes-Oxley in the US and in Europe.  As you might expect, small firms are more likely to go private after SOX in the US (but not in Europe), which is consistent with the story that SOX is burdensome on small public corporations.

I do have one nit, which is that some of the evidence might be explained by the 2003 reduction in the tax rate on dividends.  Now that the tax rate is lower, on the margins it's easier (cheaper) for managers at small firms to extract profits from the corporate level.  And managers have a stronger incentive to do so in a private company, where managers typically own more equity.

Imagine the CEO of a public company who holds 10% of the stock, looking at a pile of cash.  If dividends are taxed at 35%, she might reinvest the money or buy back some outstanding stock.  If dividends are taxed at only 15%, she might cooperate with a buyout fund to take the company private, increasing her ownership interest in the process, and then pay a dividend on the common stock.  There's a lot of moving parts there, so I'm not 100% sure, but it seems like on the margins the reduction in the dividend tax rate could help produce exactly the same results that Talley attributes to SOX. 

More likely, of course, the tax change might account for a few cases but SOX accounts for more.  What's really interesting is the normative question of what to do with Talley's result.  If SOX is indeed encouraging small firms to go private or stay private, should we care? If SOX benefits large companies (and it's not yet clear if it does or doesn't) but hurts small ones, then maybe the status quo is just fine.  Why should a company with a $25 million market cap should be publicly-traded in the first place?  It's not like there's a shortage of capital in the private equity markets these days.

Anyway, go check out the paper.  It's a good one.

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