You are on page 1of 20

ARTICLE IN PRESS

Journal of Accounting and Economics 44 (2007) 146–165
www.elsevier.com/locate/jae

Was the Sarbanes–Oxley Act of 2002 really this
costly? A discussion of evidence from
event returns and going-private decisions$
Christian Leuz
The Graduate School of Business, University of Chicago, Chicago, IL, USA
Available online 16 June 2007

Abstract

This paper discusses evidence on the costs of the Sarbanes–Oxley Act (SOX) from stock returns
and going-private decisions. Zhang, [2007. Economic consequences of the Sarbanes–Oxley Act of
2002. Journal of Accounting and Economics, doi:10.1016/j.jacceco.2006.07.002] analyzes returns
around legislative events and concludes that SOX imposes significant costs on firms. Engel, et al.
[2007. The Sarbanes–Oxley Act and firms’ going-private decisions. Journal of Accounting and
Economics, doi:10.1016/j.jacceco.2007.02.002] examine going-private decisions and point to
unintended consequences. Both studies are carefully conducted and deserve praise for tackling an
important issue. However, as my discussion highlights, several key findings may not be attributable
to SOX and we should exercise caution in interpreting the evidence. While it is not implausible
that one-size-fits-all regulation imposes substantial costs on firms, we presently do not have much
SOX-related evidence to support this conclusion.
r 2007 Elsevier B.V. All rights reserved.

JEL classification: G14; G15; G38; G30; K22; M41

Keywords: Securities regulation; Event study; Disclosure; Corporate governance; Cost–benefit analysis;
Going private

$
I thank the editors (S.P. Kothari and Jerry Zimmerman), Luzi Hail, Steve Kaplan, Alex Triantis and Tracy
Wang for helpful comments on an earlier version. I also thank Jeff Ng for valuable research assistance.
Tel.: +1 773 834 1996.
E-mail address: Christian.Leuz@chicagogsb.edu

0165-4101/$ - see front matter r 2007 Elsevier B.V. All rights reserved.
doi:10.1016/j.jacceco.2007.06.001

ARTICLE IN PRESS
C. Leuz / Journal of Accounting and Economics 44 (2007) 146–165 147

1. Introduction

Ever since its passage, the merits of the Sarbanes–Oxley Act of 2002 (SOX) have been
vigorously debated. Critics argue that SOX was hastily put together in response to several
high-profile corporate scandals and that it imposes substantial costs on firms without
commensurate benefits (e.g., Ribstein, 2002; Solomon and Brian-Low, 2004; FEI, 2005;
Romano, 2005). More recently, there is concern that the U.S. capital market is losing its
leading position and competitiveness and that the regulatory burden of SOX is a driving
force behind this development.1 Contributing to this debate, two recent studies by Zhang
(2007) and Engel et al. (2007) examine the extent to which SOX has imposed significant
(net) costs on firms. Both studies deserve significant praise for tackling this timely and
important issue.
In this paper, I discuss these two prominent studies as well as related evidence on the
costs and benefits of SOX. As the studies are carefully conducted, my discussion focuses on
the interpretation of the evidence and, in particular, the issue of whether their findings can
in fact be attributed to SOX, rather than general market trends and concurrent events
(such as revised listing rules or other news). Towards this end, I also present new evidence
suggesting that we need to exercise caution in interpreting the results of both (and related)
studies.
The first paper by Zhang (2007) examines stock price reactions to key legislative
events related to the passage and implementation of SOX. The idea is that stock returns
over key event days should reflect firms’ expected private costs and benefits of SOX.
She finds that the cumulative raw return of the U.S. market around key legislative
events is significantly negative and large (about 15%). Benchmarking this return
against concurrent foreign market returns, she finds that the U.S. market return is more
negative. However, the raw return differential is much smaller, i.e., between 2% and
7.5% depending on the foreign market, and not always significant. She also estimates
cumulative abnormal returns using market indices constructed from foreign firms without
U.S. listings and finds that the abnormal U.S. market return around key SOX events is
4.4% using stocks in Canada, Europe and Asia and almost 8% using stocks in Canada.
Overall, Zhang views her results as suggesting that SOX imposes significant net costs
on firms.
As a next step, Zhang analyzes cross-sectional differences in the stock market reactions
across firms as an attempt to shed light on the private costs of particular SOX provisions
and hence the sources of the overall costs. She documents that firms’ cumulative abnormal
returns around the key SOX events decrease with the extent to which they purchase non-
audit services prior to the Act, have charters with weaker shareholder rights, more
extensive foreign operations and larger abnormal accruals. The associations with incentive
pay and firms’ lines of business are not or only weakly significant. Zhang interprets
these cross-sectional results as consistent with her earlier findings and the notion that the
SOX provisions on non-audit services, corporate responsibilities and internal controls
impose net private costs on firms. Lastly, she presents evidence that small firms for which
the compliance with SOX was significantly delayed experienced significantly larger

1
See for example the report by the Committee on Capital Market Regulation (2006), whose work was endorsed
by the U.S. Treasury Secretary Henry Paulson, and the report by McKinsey and Company (2007) commissioned
by New York’s Mayor Michael Bloomberg and Senator Charles Schumer.

have thin trading volume and low financing needs. They contribute to the literature by highlighting potential SOX costs. ARTICLE IN PRESS 148 C. firms. which in turn leads to unintended consequences. 3 Further examples are the studies by Jarrell (1981) and Bushee and Leuz (2005). 2007). The basic idea of their study is that firms can avoid the costs associated with SOX by going private and that they will do so whenever the costs imposed by SOX outweigh the benefits generated by SOX plus any net benefit from being public prior to SOX. Overall. we would expect firms to engage in avoidance strategies. However. Leuz / Journal of Accounting and Economics 44 (2007) 146–165 abnormal returns. EHW pose three research questions: Is SOX associated with an increase in going-private transactions? Did firm characteristics associated with going-private decisions change around SOX? Did the determinants of going private announcement returns change around SOX? EHW provide evidence suggesting a higher incidence of going-private transactions after SOX. If SOX is really as costly to firms as Zhang suggests. suggesting that SOX was more costly for smaller and less liquid firms. 2006. I am sympathetic to both studies. one-size-fits-all regulation imposes significant costs on firms. Coates. whereas EHW focus on firms that go private. (2006) (EHW) addresses precisely this issue by analyzing firms’ going-private decisions around SOX as well as the market responses to these decisions. While the latter study seems less ambitious in scope. EHW remind regulators to consider firms’ potential avoidance strategies in designing and evaluating securities regulation. 2 Note that the latter net benefit includes the costs of the going-private transaction itself. . EHW predict that SOX compliance costs weigh more heavily for smaller firms due to their fixed component and that SOX provisions aimed at improving governance and making insider holdings less liquid are likely to have smaller benefits when firms are already well governed and insider holdings are already relatively illiquid (see also Holmstrom and Kaplan. Lastly. See Leuz and Wysocki (2007) for a survey of the literature in the area of disclosure regulation. The paper by Engel et al. this finding is consistent with the notion that SOX imposes significant costs. they document that smaller firms with greater inside ownership experience higher announcement returns to going private after SOX.S.2 Based on this revealed-preference approach. from a conceptual point of view. the evidence is consistent with the predicted tradeoff between being public and going private and the authors’ hypotheses about the effects of SOX on firms’ going-private decisions.4 It is generally difficult for regulation to improve upon private contracting. firms. 4 Whether SOX is in fact one-size-fits-all regulation is debated among legal scholars (see Butler and Ribstein.S. It highlights that firms typically can and will respond to costly regulation. Let me begin by stating that it is not implausible that massive.3 The subsequent discussion focuses on the interpretations of the findings and the conclusions we can draw from them. Zhang analyzes the net costs to all U. its evidence is quite important. As such. 2003). a key question is whether the two papers present convincing evidence that SOX does in fact impose net costs on all or at least a subset of U.5 Thus. In summary. consistent with the notion that going private is likely to be most beneficial to firms with these characteristics. Again. They also expect the net benefits of being public to be smaller for firms that are small. They show that abnormal returns on key events increasing the likelihood of SOX passage are positively associated with firm size and share turnover. both papers provide interesting empirical evidence on an important topic. 5 The basic idea goes back to Coase (1960).

to separate the effects of particular SOX provisions using cross- sectional analyses of the event returns. Furthermore. Berger et al. This evidence suggests that we have to be very careful about attributing negative returns over this time period to SOX.g. The former group is merely going dark. 2007).S. about the impending war in Iraq or the creation of the Department of Homeland Security). The use of concurrent foreign market returns as a benchmark mitigates but in my view does not resolve the issue (despite the fact that it significantly attenuates her results). However. This interpretation follows from their conceptual framework and the argument that by revealed preference the net benefits from being public are positive or at least non-negative. Consistent with this conjecture. Litvak.. this interpretation implies that the net costs of SOX are very large and on average 23% of firms’ market capitalization. adjusting for foreign market returns would solve the issue. consistent with a general decline in investor sentiment. In this discussion. firms. (2007) document that the observed increase in deregistrations after SOX stems from going-dark firms.S. I also show that there is a marked increase in going-private activity since 2005. if not impossible.g. Other firms discontinue trading and become a private company. there is no significant spike in going-private activity right after the passage of SOX. I show that the rest of the world exhibits similar time-series patterns in going-private and buyout activity as the US. I argue that this is unlikely and present evidence that the event days are likely to be contaminated by news that are more relevant to U. Turning to the interpretation of EHW’s findings. However. My final comment on Zhang’s study is that it is difficult. these studies have a smaller benchmark problem. Once EHW exclude going-dark firms. EHW’s primary interpretation is that positive returns are indicative of net SOX costs that firms avoided by going private. publicly-traded firms and hence it is difficult to find a control group of firms that is (a) not affected and (b) comparable to U. To illustrate my point. than foreign firms (e. 2006.S. particularly with respect to deal volume. rather than SOX. but continue to trade publicly in the OTC markets. Leuz et al. which is very different from going private (Leuz et al. firms. SOX was debated and passed as a package of complementary provisions and there are no event dates that could be assigned to specific provisions alone.6 The lack of a proper control group is the main (but not the only) reason why it is not clear that Zhang can really attribute the large negative returns around key legislative events to SOX. I show that the Chicago Board of Trade’s volatility index (VIX) increases substantially around the passage of SOX. ARTICLE IN PRESS C. unless we have reasons to believe that SOX is responsible for the increase in market uncertainty (despite the fact that it was intended to counteract the loss in investor confidence). 2006).. However. Some firms deregister from the SEC. . I conduct a simple analysis of news articles and show that the key legislative events are days with major economic and political news. this spike is likely to be attributable to the recent private-equity boom and the availability of debt for going-private transactions.S.. Leuz / Journal of Accounting and Economics 44 (2007) 146–165 149 The main problem in assessing the net effects of SOX using stock returns is that the act was imposed on (essentially) all U. An alternative explanation is that going private has positive benefits because the net value of 6 There are a number of studies that analyze the effects of SOX on foreign firms (e. I first discuss the definition of going private and point out that there are different types of SEC deregistrations.. If foreign markets were equally affected by these news events. but it is not clear that we can extrapolate their findings to U. As discussed in Section 2. My second comment pertains to the interpretation of positive returns to going-private announcements.

firms. However. and has delivered some benefits. They do not provide evidence on net benefits to firms and do not imply that SOX was beneficial overall. 2005). I discuss the main findings in Engel et al. possibly due to some unresolved agency problems between the controlling insiders and the minority shareholders.S. In addition. firms does not exist.. we are likely to make more headway by studying the implementation of SOX and its subsequent amendments. Section 4 concludes. Along these lines and to round out the discussion.S. as the policy makers intended. We need more research on these important issues. The remainder of the paper is organized as follows. these firms tend to be fairly small and the OTC markets are much less liquid than the regular U. Consequently. there is a window with a significantly positive (raw) return: July 24–26 (6. not all the announcement returns are attributable to SOX costs. exchanges (see. we have to be careful in interpreting these findings. Section 2 discusses the main findings in Zhang (2007) and the question of whether the negative event returns are attributable to SOX. Bushee and Leuz. However. Zhang’s event dates are meticulously researched and she is also very careful in assessing the significance of the event returns. Pink Sheets) that are not subject to SEC disclosure regulation as a benchmark. which is fraught with many empirical difficulties. Leuz / Journal of Accounting and Economics 44 (2007) 146–165 being public is negative for these firms. . e. To the contrary. But again. (2007) choose slightly different event days and find that the cumulative event return to SOX is significantly positive. Are the negative event returns presented in Zhang (2007) attributable to SOX? Zhang’s main result is that the cumulative raw and abnormal returns around key SOX events are significantly negative. SOX events are clustered in time and extend over several days. Thus. I review studies documenting that SOX has increased the amount of scrutiny leveled on firms. firms in the OTC markets (e. and July 18–23. stocks on those days are 3. they suggest that SOX was beneficial to firms. this interpretation suggests that SOX induces some firms to go private and in the process unlocks value for the minority shareholders of these firms. both of which facilitates ‘‘washing out’’ other effects 7 One alternative would be to use U. respectively. which she interprets as evidence that SOX imposes significant net costs on firms.S.g. Two competing studies by Rezaee and Jain (2006) and Li et al.0%.1%). In addition.9%. 6.S.. Zhang argues that on these days the agreement on the final rule eliminated concerns about even tougher rules and hence that the positive returns are consistent with SOX being costly to firms. The negative cumulative return to the SOX events is driven by three significantly negative event windows: February 2.S. (2006) and the question of whether firms go private in response to SOX. The value-weighted raw returns for U. In fact.3% and 11. three of the four key legislative events are in July 2002 and Zhang’s event windows cover all but three trading days in the second half of July. but unaffected U. her main conclusion and the sign of the cumulative return are fairly sensitive to the choice of event dates.g. 2. This setting is in stark contrast to the typical event study where not all firms are affected and event days are dispersed in time.7 This shortcoming makes it difficult to remove market-wide effects that are unrelated to SOX. In this case. But rather than focusing on the overall costs and benefits of SOX. a natural control group of comparable. ARTICLE IN PRESS 150 C. July 8–12. In Section 3. The key problem for all the three event studies is that SOX applies to all exchange-listed and SEC-registered U.

In response to these concerns and the conference discussion. 8 As a potential explanation for this magnitude. As a result of all these issues. threat from terrorism. She finds several confounding events and uses intra-day returns to assess the impact of these events.8 Zhang recognizes that market returns over the event days capture other news. market capitalization. the equilibrium between anti-business and pro-business lobby groups shifted. the magnitude of the cumulative raw return is very large and it seems implausible that SOX destroyed 15% of the U. she searches for confounding news events using the following terms: federal legislation. news about the accounting scandals or earnings news drive her results. federal regulation. and the length and clustering of Zhang’s event windows.S. an (admittedly more subjective) analysis of major news events and headlines in the Wall Street Journal over key legislative events does not change my conclusions below. firms to SOX. the creation of the Department of Homeland Security. Leuz / Journal of Accounting and Economics 44 (2007) 146–165 151 and isolating the event return. To make matters worse. except for 3 days where the proportion of negative and positive news is roughly even (all of which fall into the key event windows). The corporate scandals in the U. at the time. and a massive decline in the stock markets. Table 1 reports several NYT headlines as well as quotes from the news summaries as examples. note that the problem of confounding news events is not limited to other rulemaking activities and earnings news. She finds that earnings news in July were generally more positive than the rest of the year. Besides. NYSE and NASDAQ changed their listing requirements in response to the corporate scandals around the same time SOX was passed. negative macroeconomic news. I conduct a simple analysis of headline news over the four significant event windows reported in Zhang’s Table 2. I do not think that we can draw any inferences with respect to SOX from the raw market return. Second. Zhang also analyzes quarterly earnings releases to check whether negative earnings news cluster in July 2002. To get a sense for this problem. It is obvious that the key legislative event windows are also days with major political and economic news. and the legislative response to these scandals are also mentioned. Interestingly. and securities fraud. she dismisses that other concurrent rulemaking activities. the general market trend at the time. using this news summary makes picking major headlines less subjective. First. Zhang uses foreign market returns in Canada. fears of a legislative overreaction to the scandals or concerns about costly regulation are not once discussed in these news summaries. fears about a recession. Even if this conclusion were correct. ARTICLE IN PRESS C. Zhang discusses that the market reaction may also reflect expectations about future anti-business legislation.S. The headlines refer to extensive military spending. scandals. the impending war in Iraq. I restrict the analysis to the daily news summary provided in the New York Times (NYT) for two reasons. it seems obvious that we cannot simply attribute the raw market return for U. Recent developments easing the burden of SOX support this conjecture. The latter is generally cast in a positive light. Event returns could also be affected by broad stock market trends and major macroeconomic or political news. Costly anti-business regulation is often followed by pro-business regulation (or amendments). the NYT is more geared towards political news and ‘‘big-picture’’ economic news than business newspapers and hence well suited for my purposes. While it is possible that. Based on these analyses. Considering these confounding news events.S. However. I find it implausible that this shift had a lasting effect and hence explains the large negative reaction. To address this issue. .

but economists called the drop a mirage. to $451 billion in 2007. to the surprise of a number of analysts. as Congress returns from recess to a dizzying round of votes on creating a Department of Homeland Security by summer’s end 14 7/8/2002 A1 Economy still Scandals continue to crash through pushing ahead executive suites. according to Defense Department documents 1 2/2/2002 C1 Economy remains The unemployment rate fell to 5. senior defense officials said 14 7/11/2002 C9 The bear market The S& P 500 and the Nasdaq sunk to their worsens lowest levels since 1997 16 7/18/2002 A1 Congress presses on Democrats and a growing number of Iraq plan Republicans want the White House to provide a public accounting of plans for ousting Saddam Hussein 16 7/19/2002 A1 House committees House Republican leaders said they would overruled give the administration almost all it wanted in a new Department of Homeland Security. And through it all. The threat of terrorism hangs in the air. [y] Auto sales in the United States fell 5. the recovery’s stamina depends on whether the falls from grace in corporate America continue long enough to dent consumers’ resilience 14 7/10/2002 A1 US considers Wary American military planners are considering Jordan as base for using bases in Jordan to stage air and attack on Iraq commando operations against Iraq in the event the United States decides to attack. Consumer confidence and manufacturing declined slightly.S. short-circuiting committee efforts to maintain jurisdiction over agencies by keeping them out of the new department .8% in December. Stock markets have tumbled. ARTICLE IN PRESS 152 C. the economy has pushed forward. Leuz / Journal of Accounting and Economics 44 (2007) 146–165 Table 1 Economic and political news in the U. and around the world on key legislative events related to the passage of SOX Event Date Page Headline Quotes 1 2/2/2002 A1 A nation challenged: The Bush administration wants to increase Bush seeking big rise the Pentagon’s yearly budget by $120 in military spending billion over 5 years.6% from weak 5. To many economists.1 percent in January compared with the same month a year earlier 14 7/8/2002 A1 Congress to debate The federal government begins to plan for a new reorganize itself in earnest this week to security agency respond to a new world of terror and domestic unease.

500 gained 5. [y] By the end of last week. Leuz / Journal of Accounting and Economics 44 (2007) 146–165 153 Table 1 (continued ) Event Date Page Headline Quotes 16 7/19/2002 A3 Bush renews first. 2007. as to fall investors seemed to fear a slowdown in the world economy and shrugged off President Bush’s statement that ‘‘there is value in the market’’ now 17 7/24/2002 A15 Opposition to Many House Democrats are considering security bill voting against the proposed Department of Homeland Security tomorrow. if they hold.29. President Bush assured troops just back at strike vow Fort Drum. . N. the telecommunications bankruptcy company hurt by an accounting scandal and a rapid erosion of its profits.Y.7 percent This table presents key headlines from daily New York Times news summaries published on key legislative event dates. The S. ARTICLE IN PRESS C. Table 2). the investor trust on which the bull market of the 1990s had been founded seemed to have almost entirely vanished 16 7/22/2002 A1 WorldCom files for WorldCom. citing ideological differences with some Republican provisions 17 7/25/2002 A1 Deal on corporate House and Senate negotiators agreed on an crackdown overhaul of corporate fraud. The fourth column gives the headline and the last column provides salient quotes from the articles. or 6. streak to 8. the next two columns provide the date and page of the news article.4 percent. after serving in Afghanistan that the United States would preemptively strike countries developing weapons of mass destruction 16 7/20/2002 A1 Stocks tumble again Stocks continued their plunge yesterday in a four-month rout that has sent the major indexes below their lows of last September and to levels that.& P. and President Bush says he will sign it 17 7/25/2002 A1 Stocks break losing The Dow surged 488 points. will make this the worst year for the market since the 1970s 16 7/21/2002 A1 Bush economic team President Bush’s economic team is facing faulted criticism for not responding sufficiently to growing economic and political pressures. The table focuses on the four event windows that exhibit significant event returns (see Zhang. The first column below refers to the event number in Zhang (2007). accounting and securities laws.. has submitted the largest bankruptcy filing in United States history 16 7/23/2002 A1 Stock prices continue The stock market fell sharply again.191. Final approval is expected in days.

10 To me this evidence suggests that a large portion of the event returns is driven by broad changes in the economic outlook and general macroeconomic uncertainty at the time. Table 2 reports the average VIX levels for various intervals.0%. To illustrate my concern about the effects of a general market trend in July 2002. 2006). Thus. These news events remain a substantial concern. 2001. Panel B reports weekly averages for the VIX and shows that key SOX events fall into a time period that exhibits a volatility spike that is comparable to the volatility spike following the events of September 11. Again. This index is a measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices and widely used barometer of investor sentiment (Baker and Wurgler. If anything. . as Table 1 shows.S. mainly for benchmarking purposes. Panel A reports the yearly averages from 2000 to 2002. market return substantially reduces the cumulative abnormal return to SOX and renders it often insignificant. markets. but it is unlikely to solve the problem. equity markets in July 2002. the U. stocks. These adjustments are clearly an improvement. but unrelated to SOX (e.3% and 8. Confirming this impression.S.S.g.S. Zhang reports that including implied volatility indices for the FTSE100. While this finding is reassuring.S. military spending.S. Several of the news articles in Table 1 indicate that the U. news about U.S. I use the VIX simply to show that the passage of SOX falls into a very volatile and uncertain market period. Panel C shows that the increase in market volatility was sustained through September 2002 and then starts declining. Thus.. Similarly. Leuz / Journal of Accounting and Economics 44 (2007) 146–165 Europe and Asia to adjust U.S. However. 10 In footnote 13. the explanatory power of the model was extremely small.S. It is unlikely that the passage of SOX is responsible for this increase in volatility.S. market returns using a macroeconomic model following Flannery and Protopapadakis (2002). 2007). market returns from a market model with foreign returns and finds that the cumulative abnormal return to SOX is still negative and between 4. the volatility spike is not isolated to the legislative events leading to the passage of SOX. S&P500. It shows that the volatility index is generally below 30%. my concern is not limited to daily innovations in these indices. (2006) report that bid-ask spreads widened before SOX and then fell dramatically over the 9-month period following the passage of SOX (see also Coates. In addition. in sum. Benchmarking with foreign returns can take out worldwide news and global market trends. as most of the key event windows fall into this month. benchmarking with foreign returns helps with respect to this concern. However. ARTICLE IN PRESS 154 C. even if SOX entails major net costs to firms. and TSE60 in her abnormal foreign returns model does not alter her inferences. To account for the fact that foreign stocks likely react differently to global news than U. there are many news events that are fairly specific to the U.5%). I am concerned that the cumulative abnormal return to SOX simply reflects the massive and general downward trend in the U.S. Zhang estimates abnormal U. market return. market was leading the downward slide in equity markets around the world. so that the abnormal market return essentially reflected the raw U.9 Simply subtracting returns in these foreign markets from the U. Jain et al. but they are unlikely to address concerns about confounding news events in the U. the Department of Homeland Security). it is not clear what we can 9 The conference version adjusted the U. strategy with respect to Iraq. But the cumulative abnormal return remains negative in all cases and in many cases is still fairly large in magnitude ( 2% to 7. the news summaries in Table 1 refer to articles that view legislative progress on SOX as reducing uncertainty and restoring confidence in corporate reporting.S. market returns. I examine the VIX for the S&P 500.

86 911 September 2001 35.15 Event 14 (SOX) 7/08/2002–7/12/2002 31. . She finds that firms’ cumulative abnormal returns around the key SOX events decrease with the extent to which they purchase non-audit services prior to the Act.08 Event 16+17 (SOX) 7/22/2002–7/26/2002 40.24 Month +2 November 2001 26.07 Month +1 October 2001 35.11 Based on these findings. Leuz / Journal of Accounting and Economics 44 (2007) 146–165 155 Table 2 Trends in the volatility index (VIX) for the S&P 500 Frequency (Year. Panel B presents the averages for the weeks before and after the event of 9/11/2001 as well as the key legislative SOX events from Zhang (2007). more extensive foreign operations and larger abnormal accruals.75 2002 1/01/2002–12/31/2002 27. she concludes that the cross-sectional analysis ‘‘rejects the hypothesis that three major provisions entail no net costs to firms. My second major comment applies to the cross-sectional analysis of SOX event returns. the event-by-event analyses show that the signs of the associations with various firm characteristics are often not robust. have charters with weaker shareholder rights. Month.95 Week 1 (SOX) 7/01/2002–7/05/2002 28. ARTICLE IN PRESS C. Table 5.95 Week +1 (911) 9/17/2001–9/21/2001 41.29 Panel B: Weekly averages around 9/11/2001 and SOX-related events Week 1 (911) 9/04/2001–9/07/2001 27.52 Week +2 (911) 9/24/2001–9/28/2001 34. Zhang views this analysis as shedding light on the costs of individual provisions. Panel A presents the average levels in 2000.27 SOX July 2002 34.63 Month 1 June 2002 25.32 2001 1/01/2001–12/31/2001 25.’’ 11 However. Panel C reports averages for the months around September 2001 and July 2002. conclude from the negative returns around key SOX events.70 Panel C: Monthly averages around 9/11/2001 and SOX-related events Month 1 August 2001 21.05 Month +1 August 2002 33. particularly not for the earlier event dates (see Zhang (2007).87 Event 15+16 (SOX) 7/15/2002–7/19/2002 36. Panel B). Week) Time period Average VIX Panel A: Yearly averages 2000 1/01/2000–12/31/2000 23. 2001 and 2002.65 This table presents averages for the S&P 500 volatility index (VIX) from the Chicago Board of Trade.74 Month +2 September 2002 37.29 Week +1 (SOX) 7/29/2002–8/02/2002 34. with or without the market adjustment using foreign stock returns. providing additional support for the hypothesis that the market initially expected SOX to be costly.

changed or added. find it easier to deal with the additional SOX requirements than firms. which use innovative SOX-related characteristics (e. 13 However. rather than along the same continuum for all firms. these tests are more likely to provide sensitivity checks with respect to Zhang’s general conclusion that the negative cumulative return for all firms indicates that SOX imposes net costs on the U. it is not clear to me that we can interpret the cross-sectional results as evidence on the costs (or benefits) of particular provisions. Thus. we would have to be careful about what we conclude from this finding. which in turn makes the effect of SOX hard to predict. finding such firms is not trivial. if not impossible. 2003). at the same time. It is plausible that excessive provisions are more costly for firms that already have good internal controls and governance. ARTICLE IN PRESS 156 C. there are clearly limits in how far we can take the cross-sectional results. However. Thus. not also more negatively affected by the other concurrent news events over the passage of SOX. to do. assessing the impact of specific provisions is important. such as executive loans or non-audit services. firms. Prior work on disclosure regulation shows that 12 This is in essence the identification approach in Chhaochharia and Grinstein (2007) and Hochberg et al. this identification strategy relies crucially on our ability to identify firms that are (without much doubt) more negatively affected by SOX and. . need further firm characteristics such as firm size or the quality of governance to interpret their findings. but it would still be possible that SOX as a whole has net benefits. if we can find firms that a priori are more (or less) likely to be negatively affected by SOX.. even if we were able to create such a classification and found that it is positively associated with firms’ cumulative abnormal returns to key SOX events.g. In my view. SOX was passed as a package of provisions and there appear to be few event days where only particular provisions were debated. In this case. showing that these firms indeed experience more (less) negative abnormal returns should help with the identification of SOX effects and increase our confidence in the results. in principle. whether firms are in compliance with SOX provisions or lobbied against SOX). for which fewer and less formal controls are optimal. as Zhang argues (see also Holmstrom and Kaplan. Furthermore. we would have to identify the SOX effects relative to firms’ optimal governance and internal control structures. Suggesting that there are both winners and losers. (2007). One of the problems is that the optimal levels of internal controls. may offer clearer predictions in this regard.12 However. as it seems unlikely that the optimal level for these practices is zero. Leuz / Journal of Accounting and Economics 44 (2007) 146–165 While I agree that. the cross-sectional prediction reverses. Chhaochharia and Grinstein (2007) provide evidence that large firms that are less compliant earn positive abnormal returns but small firms that are less compliant earn negative abnormal returns around key SOX events. for which strong formal internal controls are optimal. (2007). it is difficult to disentangle the effects of individual provisions on the event returns. The reverse would hold for negative relations. It is also conceivable that firms. In order to address this problem. Even studies by Chhaochharia and Grinstein (2007) and Hochberg et al. That is. outright prohibition of certain practices. corporate governance or non-audit services differ across firms. Let me conclude this section by stating that I would not be surprised if SOX imposed significant net costs on at least some firms.S.13 This is obviously difficult. But this is not necessarily true. It would indicate that SOX was more costly for firms with this particular firm characteristic. in my view.

as Berger et al. Berger et al. given that much of its implementa- tion was delegated to the SEC and the Public Company Accounting Oversight Board (PCAOB). 1981. rather than the SOX provisions per se. suggesting that SOX has been costly to foreign firms. That is. the survey by Leuz and Wysocki (2007). Leuz / Journal of Accounting and Economics 44 (2007) 146–165 157 it is difficult for regulators to improve upon private contracting. . However. there is evidence that SOX is costly to particular groups of firms. We can use matched firms from the same country or even matched firms from the same country that are also cross-listed on U. This approach is similar in spirit to Zhang’s cross-sectional analyses. Litvak (2006) finds that foreign firms that are subject to SOX react more negatively than either matched cross- listed foreign firms that are not subject to SOX or non-cross-listed foreign firms.. firms. (2007) fall into this category. exchanges. respectively. Thus. Berger et al. 2005).14 We also have evidence that one-size-fits-all disclosure regulation can be costly for many firms (e. In my view. relative to firms that did not lobby (and hence are deemed less affected). Hochberg et al.S. they can be viewed as corroborating her conclusion that SOX imposes net costs on firms. They demonstrate that firms whose insiders lobbied against a strict SOX implementation experience significantly positive abnormal returns over the passage of SOX. market. Second. 2006). relative to U. Litvak. Given the problems in properly identifying SOX effects. the inclusion of foreign firms in SOX was more of a surprise than an intention and the issue was discovered on the last day of the Senate debate. (2007) use lobbying behavior of corporate insiders as a way to identify firms that are more likely to be affected by SOX. He argues that the costs of SOX are subtle and likely to stem from incentives to overspend on internal controls. the event returns should reflect the net costs and benefits of SOX. Bushee and Leuz.S.g. The advantage of using lobbying behavior. the problem may be that managers and directors bear only a small fraction of the compliance costs but share disproportionately in a liability from control deficiencies.g. (2006) find that the value-weighted portfolio of cross-listed foreign firms has a significantly more negative stock price reaction to SOX than the value-weighted U. But as Coates (2007) points out.S. Jarrell. ARTICLE IN PRESS C. For instance. as the results in Berger et al. The studies by EHW and Leuz et al. (2006) and Litvak (2006) assess the impact of SOX on foreign firms that are cross-listed on U.g. the findings for foreign firms are easier to interpret than Zhang’s results for two reasons. firms and foreign firms. First. it is conceivable that foreign firms are affected more negatively if SOX compliance creates contradictions with foreign governance regulation.. (2006) and Litvak (2006) are consistent with Zhang’s findings. (2006) point out. Zhang confirms both of these findings in her sensitivity analyses. More closely related to Zhang’s study. e.S. there are more natural control groups for foreign firms. which also tries to identify firms that are more negatively affected by SOX. is that it relies on observable behavior that is more directly related to SOX. To the extent that these firms are affected similarly by confounding news events but differentially by SOX. That is. however. However.. Similarly. They interpret this result as suggesting that SOX improves the disclosure and governance of lobbying firms and that SOX benefits outside shareholders. the set of firms 14 See. it is not clear that SOX is appropriately described as one-size-fits-all regulation.S. markets but not subject to SOX (e. it is of course an open question whether or not we can extrapolate the findings for foreign firms to U. This feature implies that they can use a more sharply defined event window that is less susceptible to other concurrent news events.

In my view. It involves a re- capitalization or concentration of ownership and it implies that the firm is no longer publicly traded. 1989). In the end.S. which are transactions initiated by affiliates (i.15 But of course the set of lobbying firms is likely to be small and probably not representative. Lehn and Poulsen. However. it includes firms that simply perform a reverse-stock split as well as firms that deregister from the SEC but continue to trade in the Pink Sheets. First. However.g. it is important to consider the definition of going private. firms or the economy as a whole.16 This definition has been commonly used in the literature (e. smaller firms). as noted above. (2007) argue that the former group of firms is more appropriately viewed as ‘‘going dark. we still need firm characteristics to aid our interpretation of the findings. Second. the SEC’s definition and EHW’s sample construction do not differentiate between firms that continue to trade and those that do not. However.. in particular. the rule refers to firms’ holders of record and not the beneficial shareholders.. EHW essentially take this approach. EHW present evidence to this effect in their Table 1. the interpretation of cross-sectional differences in abnormal SOX returns hinges critically on having convincing predictions on how SOX has differentially affected firms. 1984. the conclusion that SOX has been beneficial to outside shareholders of lobbying firms is more plausible if there is evidence that these firms are poorly governed or that insiders of these firms consume more private control benefits at the expense of outsiders. not identifying these firms is likely to make it harder to find significant differences relative to the control group.’’ rather 15 Of course. in interpreting this evidence. ARTICLE IN PRESS 158 C. it ignores firms that have already fewer than 300 record holders and hence do not have to file Schedule 13E-3 but nevertheless decide to go private. This framework provides a nice structure for their analysis and a number of plausible empirical predictions. Leuz et al. 2007).. 16 Strictly speaking. Do firms go private in response to SOX? A different approach to assessing the costs (or benefits) of SOX is analyzing firm behavior and. EHW follow the SEC’s definition and restrict their sample to Rule 13e-3 going- private transactions. Moreover. Without such evidence. the documented return differential could also reflect that lobbying firms are better governed firms and hence better able to cope with SOX or that better performing firms have more time to lobby. In sum. 3. Record holders are counted at the level of the intermediary (for more discussion of this issue see Leuz et al. .g. but it is problematic for several reasons. The first question with respect to EHW’s study is whether SOX is in fact associated with an increase in going-private activity. firms’ avoidance strategies. firms can lobby in other ways that are less observable to researchers. we can conclude that there is return-based evidence that SOX imposes net costs on particular groups of firms (e.. but little evidence on net SOX costs to all U. DeAngelo and DeAngelo. Leuz / Journal of Accounting and Economics 44 (2007) 146–165 that wrote letters against a strict implementation of SOX is well defined compared to the approach in Zhang’s study that uses various firm characteristics. For instance. They begin with the basic observation that firms can avoid the costs associated with SOX by going private whenever the incremental costs imposed by SOX outweigh its benefits plus any net benefit from being public prior to SOX. which I have summarized in the introduction. going private is a change of organizational form. insiders or entities) that take the number of ‘‘shareholders’’ below 300 and allow the firm to deregister from the SEC.e.

inferences are robust to dropping the remaining going-dark firms. well-performing and growing firms. ARTICLE IN PRESS C. The definition of going-private firms primarily affects EHW’s analysis of going-private trends but has little impact on the other findings. rather than private. we would probably be much less concerned about a SOX effect on relatively small and distressed firms than we would be about an effect on larger. the ‘‘Going Private Flag’’ indicates that a private acquirer or a financial sponsor is acquiring a public target and upon completion. EHW explicitly report that. EHW impose further data restrictions. Also. In contrast. which is important with respect to the conclusions that we draw from finding that SOX has fueled either trend.. exchange- traded firms with coverage in CRSP. it matters because the stock market responds very differently to going-private and going-dark announcements. 18 I include all three types of buyouts as the distinctions in Thomson Financial appear to be somewhat arbitrary.. For these analyses. note that several tests include controls for ‘‘transaction type’’ or Pink Sheet trading. going-private strategies are not homogenous. the distinction matters because it highlights that firms can respond to costly regulation in multiple ways. The former announcements usually result in large positive reactions. because these firms primarily terminate their obligation to provide financial statements. As EHW also note. with the exception of their Table 1 results. more distressed. such as extensions to the compliance with Section 404 (Leuz et al. To reconcile this issue. Similarly. I examine buyout and going-private trends over a longer window. (2007) show. but remain publicly traded. which make the sample biased towards larger. While eliminating these firms is desirable 17 EHW’s other results are less affected because not many going-dark firms enter their regression analyses. Leuz / Journal of Accounting and Economics 44 (2007) 146–165 159 than going private. 2007). (2007) show that going-dark firms are smaller. 2007. Furthermore. EHW carefully eliminate cases where the acquirer is a foreign company and where the target is in bankruptcy or liquidation. these transactions likely comprise many of the going-dark firms (see their Table 9). i.17 That is. management buyout (MBO) or leveraged buyout (LBO).. Note that this classification in Thomson Financial does not map into the going-private definition used in EHW. First. the target will no longer have any of its shares traded on the public market. Thus. The distinction is not just a semantic issue. Table 6). Going-dark decisions increase immediately after the passage of SOX and their monthly frequency closely ‘‘tracks’’ events related to the implementation of SOX. it seems that a going-private transaction could also be classified as an LBO or MBO if it was highly leveraged or involved management. footnote 15). while the latter announcements lead to significantly negative reactions (Leuz et al. This pattern is suggestive of a SOX effect.18 For instance. Given their going-private definition. It matters both conceptually and empirically. Second.e. have weaker performance and governance than going-private firms. Leuz et al. As Leuz et al. EHW show that going-private announcement returns are much smaller for transactions involving reverse-stock splits and small shareholder purchase offers. going dark and going private are economically very different. I collect data from Thomson Financial Banker One on all M&A deals around the world that are announced between 1/1/1999 and 12/31/2006 and classified as either a going-private. given the definitions for LBO and MBO. from 1999 to 2006. . there is no significant increase in going private in the months immediately following SOX. However. According to Thomson Financial. the increase in going-private decisions per quarter is no longer statistically significant once firms that continue to trade in the Pink Sheets are removed from their sample (EHW. the increase in SEC deregistrations after SOX is primarily driven by firms that go dark. These findings may be surprising in light of all the anecdotal evidence that going-private activity has significantly increased over the last few years. That is.

35 2000 416 43.765 133.602 215. the total transaction value of all deals (in million U.41 145 29. the UK.$) and the average deal size (in million U. the UK. type.480 173.e. I keep all deals for which information on the year. Leuz / Journal of Accounting and Economics 44 (2007) 146–165 in assessing the impact of SOX.045 117.388 94.and 26 132 129 19 46 101 10 157 136 post-SOX (in %) Panel B: Going-private deals 1999 113 17. and the rest of the world).03 577 31.72 346 19.34 2004 85 39. The data is from Thomson Financial Banker One.413 260. MBO.97 2001 92 9250 102... .112 170.325 555.S.23 2004 383 79. type. Panel A reports the number of GP.S.510 100.75 2005 107 74.55 2003 128 10.813 150.389 678.70 29 2.697 505.99 38 22. No.45 243 93.859 104. I eliminate duplicate entries in the database and aggregate deals by year.288 1. the total US$ transaction value and the average deal size in US$ for each year and the three country groupings.. the U.195 734. but it is much more pronounced Table 3 Buyout. Towards this end.614 197.04 387 37.01 614 73.838 156.01 504 25.419 77.491 147.07 2006 745 387.319 406.08 2002 98 11.61 510 60. Panel A includes all three types of buyout transactions whereas Panel B is restricted to deals classified as going- private transactions.76 377 27. which for some deals are missing.707 164. The bottom row in each panel computes the percentage increase averaging three years before and after SOX. and the rest of the world.009 467.177 369.555 227.84 2003 272 28.e.77 36 3. particularly in 2005 and 2006.33 2005 552 118. and the rest of the world.548 346.39 2001 256 15..S.16 816 123.666 169.09 340 42.34 2002 264 29. and target country (i.753 467.S.38 Increase in 3-year average pre.899 94. consistent with anecdotal evidence.78 39 17.165 97.096 225. But I do not require the ownership percentages sought and/or the transaction value. I then aggregate the data into three country groupings: the U. target name and country are non-missing.and going-private patterns across time for the U.69 56 9.$) by year and region.11 133 12.467 125.13 66 9.S.20 696 31..669 165.650 237. Table 3 presents the number of deals.17 183 15. management buyout (MBO) or leveraged buyout (LBO).70 151 11.00 324 82. ARTICLE IN PRESS 160 C.52 618 49.S.53 2000 117 18. Transaction Average. Panel A shows a dramatic increase in buyout activity for the U. acquirer name and country.992 1960.304. i. and LBO deals.129 101.928 87.964 102.03 2006 163 301. The latter two statistics apply only to deals with non-missing transaction values.503 169.31 1028 225. I eliminate duplicate deals and entries involving the same buyout transaction.30 140 43.53 22 4.412 102.and going-private patterns around the world Year US UK Rest of the world No..33 415 19.96 125 13.02 587 33. This increase is present in the number of deals and the total transaction volume.342 495.723 106.77 131 18. Panel B reports the same three statistics as Panel A but for going-private transactions only. The sample includes all deals that are announced between 1/1/ 1999 and 12/31/2006 and that are classified by Thomson Financial as a going-private (GP).60 37 18.680 92. I simply intend to illustrate time trends in buyout activity around the world.212 198.40 443 28. Transaction Average No.and 1 174 197 38 79 201 11 114 111 post-SOX (in %) This table presents buyout.26 Increase in 3-year average pre.514 539.531 159.609 471. Transaction Average of value deal of value deal size of value deal size deals in $ size in $ deals in $ in $ deals in $ in $ Panel A: All buyout deals 1999 283 38. the UK. from 1999 to 2001 and from 2003 to 2005.093 80.

the UK and the rest of the world. the average deal size steadily increases. Going-private trends around the world (number of deals). Going Private . Panel A shows that buyout activity has also risen in other countries around the world. due to the compliance extensions granted to smaller firms). Moreover.S.. The sample includes all deals that are announced between 1/1/1999 and 12/31/2006 and that are classified by Thomson Financial as a going-private transaction.S. I examine buyout and going-private trends in the UK and the rest of the world and use them as a benchmark. which is also not what we would expect to see if the recent trends were fueled by SOX. and the rest of the world. In fact. the percentage increase in buyout volume averaging 3 years before and after SOX is similar for the U.K. in the U. particularly in terms of transaction value. hence. there is a clear spike in going-private activity in 2003.. In either case. (and other countries). Similarly. But again. Finally.S.S. rather than increases. but the percentage increase is much smaller than in the U.S. To address this question. the average deal size has been increasing over time in the U. Panel B shows that the UK and the rest of the world also exhibit a substantial increase in going-private activity in recent years. 1 illustrates graphically how closely world-wide trends in going-private transactions move together. together with a decrease in average deal size. ARTICLE IN PRESS C. The main question. SOX has been particularly costly to smaller firms and. trend with those in other countries. the UK. we would expect to see that the average deal size falls. Rest of the World 200 Deals 150 100 50 0 1999 2000 2001 2002 2003 2004 2005 2006 Years Fig. and the rest of the world. as more firms are driven off the public markets. Thereafter. leading the way. it exhibits a small spike in 2003 but reaches its maximum in 2006. The data are from Thomson Financial Banker One. there is a clear upward trend in buyout activity in the US.. is whether or to what extent this trend is attributable to SOX.e. 250 U. The figure presents going-private trends for the U. with the U. it is instructive to compare the U. 1.Number of Deals 300 U. . even if the response to SOX was delayed (e. Moreover. however. there is an even more pronounced decline in the average deal size for the rest of the world (excluding the UK) in 2003. The figure reports the number of deals in the U.g. i. Panel B shows that both the UK and other countries around the world exhibit a spike in going-private activity in 2003. This evidence speaks against a significant SOX effect...S.S. Leuz / Journal of Accounting and Economics 44 (2007) 146–165 161 in the latter.S. Panel B reveals similar patterns when focusing on going-private transactions only. except that the increase in going-private transactions is not monotonic.S. Both of these observations could be indicative of a SOX effect. Fig.

2006). the net benefit of being public prior to SOX is by revealed preference (weakly) positive. which EHW acknowledge. Any anticipation implies that the unconditional market response to going private and hence the net SOX costs are much higher. As this framework focuses on efficiency arguments and abstracts from agency considerations. ARTICLE IN PRESS 162 C. as Hochberg et al. In this case. . reflect a pronounced SOX effect. (2006) present evidence pointing to cost of capital benefits from resolving internal control deficiencies. My second comment on EHW pertains to the interpretation of going-private announcement returns. an alternative interpretation. (2006) find a decline in earnings management and an increase in the informativeness of firms’ earnings announcements. both the evidence in Hochberg et al. Aramark Corporation is a case in point as it has gone private twice in recent years. Based on this interpretation. (2007) emphasize. Thus.19 In my view. the benefits from avoiding compliance with SOX) minus any net benefit to being public. this effect is simply too large to be solely attributable to SOX. especially considering that investors presumably expect firms to go private with some positive probability. For instance. which is intended to protect minority shareholders. Standard & Poor’s Leveraged Buyout Reviews in Q2 2006 reports that the leverage multiple of buyout deals has been steadily increasing since 2001. exhibit significantly less negative returns to going-dark announcements. Leuz / Journal of Accounting and Economics 44 (2007) 146–165 Based on this (admittedly simple) comparative evidence. and consistent with this interpretation. it might even be a benefit if SOX induced some firms to go private. For instance.S. (2006) can be viewed as supporting the idea that SOX and its provisions mitigate 19 Interestingly. However. 20 Similarly..e. e. This finding may raise the question of why firms did not resolve these deficiencies earlier.. it seems unlikely that the going- private patterns in the U. this alternative interpretation suggests that going private confers substantial benefits to minority shareholders. In my view. possibly due to some unresolved agency problems between the controlling insiders and the minority shareholders. Cohen et al. And they would have to be even larger if the net benefit from being public is strictly positive. Leuz et al. by partially reversing valuation discounts due to unresolved agency problems.20 From this perspective. Ashbaugh et al.g. many going-private firms come back to the public equity markets after some time. Thus. In fact. the observed announcement returns provide a lower bound on the net costs of SOX to firms that choose to go private. Put differently. (2007) show that firms that file a Schedule 13E-3. is that the net value of being public is negative. the going-private announcement returns (EHW. and that this additional scrutiny has had several positive effects. Thus. this interpretation of the evidence is consistent with a small but growing body of research suggesting that SOX and its provisions have increased the scrutiny that public firms face. as intended by policy makers. given the documented benefits.. we expect fewer firms to be taken public in future years. If SOX compliance costs are a reason for going private. Table 3) imply that the net costs of SOX exceed 23% of the market capitalization of going-private firms. (2007) that firms that lobbied against a strict implementation of SOX and the findings of Ashbaugh et al. EHW’s framework suggests that going-private announcement returns can be interpreted as an estimate of the net costs of SOX (i. the positive announcement return not only reflects any compliance costs that are avoided but also any value that is ‘‘unlocked’’ in going private. the emergence of private-equity firms and the widespread availability of debt financing for buyout transactions are likely to be the key drivers behind the recent trends around the world. corporate insiders may be reluctant to give up their private control benefits (see also Greenstone et al.

even if a going private trend in response to stricter regulation existed. This discussion highlights that we need to exercise caution in interpreting evidence on the costs of SOX. EHW examine going-private decisions before and after SOX and point to potentially unintended consequences of the Act. Leuz / Journal of Accounting and Economics 44 (2007) 146–165 163 unresolved agency problems between corporate insiders and outside investors.. In my view. More generally. Besides. firms. all of which makes it difficult to attribute the negative event returns to SOX. simply due to market pressures after the scandals. Leuz et al. Similarly. Thus. My discussion of these studies focuses on the interpretation of the evidence and. Berger et al. the large positive announcement returns can also be interpreted as suggesting that going private is able to ‘‘unlock’’ firm value for minority shareholders. despite the fact that it is not implausible that SOX imposes net costs on at least some firms. Finally. governance practices would have taken place irrespective of SOX. 4. rather than general market trends and concurrent events. Both studies deserve significant praise for taking on an important and timely issue. Conclusion This paper discusses evidence on the costs of the Sarbanes–Oxley Act (SOX) from stock returns and firms’ going-private decisions. while going-private activity has substantially increased in recent years. i.S.S. The main problem for Zhang’s study is that she lacks a good control group of unaffected firms and that the event windows are fairly long and clustered in time. about the impending war in Iraq) and general market trends around the passage of SOX suggest that Zhang’s results likely overstate the negative effect of SOX on U.. (2007) present evidence consistent with the notion that firms go dark partly in response to the additional scrutiny of SOX and that outside investor protection is taken more seriously in the post-SOX environment. (2006) show that stock market reactions to SOX are more positive for foreign firms from countries with weaker enforcement of investor rights. EHW also face a benchmark problem with respect to trends in firms’ going-private decisions. But I hasten to add that it would not be surprising if one-size-fits-all regulation . It is much less severe but still important. EHW show based on going-private announcement returns that SOX is more costly for certain groups of firms. the announcement return results in EHW are consistent with these studies and contribute another important piece of evidence to this growing body of literature. there is little evidence that SOX is responsible for this trend. For instance. the issues of whether there is evidence that SOX imposes net costs on firms and whether their findings can in fact be attributed to SOX. Their analyses are carefully conducted and present interesting empirical evidence. other concurrent news (e. my discussion raises questions about popular claims that SOX has been excessively costly to firms. Zhang analyzes stock returns around key legislative events and concludes that SOX and its provisions have imposed significant net costs on firms. In fact. it is not clear that such a trend should be viewed negatively. While the evidence is not conclusive in all respects. be it from event returns or going-private decisions. which again makes estimating the marginal effect of the SOX provisions difficult. in particular. suggesting that SOX improves the protection of outside investors in those firms. the studies cover important ground and clearly contribute to the literature. NYSE and NASDAQ changed their listing requirements in response to the corporate scandals around the same time SOX was passed. smaller firms with greater inside ownership. In fact. some changes to U. ARTICLE IN PRESS C.g.e. However.

Hochberg. V. 2006. 2006 /http://www. Journal of Accounting and Economics 39. it might also be interesting to examine empirically how the SEC’s enforcement behavior has changed in recent years and what (incremental) role the newly created PCAOB assumes when it comes to enforcing securities laws. 2006. J. Moreover. P.S. however. P. and the 1964 Securities Acts amendments.V. Section 404 Costs Survey /http://www. Bushee.. Y. we need more research on these important issues. P. D. 2007. 2006.. H. The Review of Financial Studies 15. which is fraught with many empirical difficulties. Journal of Accounting and Economics.S.J.. Coase.. Washington.. ARTICLE IN PRESS 164 C. 129–151. Berger. it is possible that SOX set off incentives to overspend on internal controls because managers and directors bear only a small fraction of the compliance costs but share disproportionately in a liability from control deficiencies (Coates..G.htmlS. Vissing-Jorgensen. Leuz / Journal of Accounting and Economics 44 (2007) 146–165 imposed significant net costs on firms. Kinney. Protopapadakis. Financial Executive International (FEI).. Holmstrom. 91–116. 2005. Trends in earnings management and informativeness of earnings announcements in the pre. doi:10. R. The goals and promise of the Sarbanes–Oxley Act. X. Journal of Law and Economics 27. M. Economic consequences of SEC disclosure regulation: evidence from the OTC bulletin board. Wurgler. The Sarbanes–Oxley Debacle: How to Fix it and What We’ve Learned.. But rather than studying the overall costs and benefits of SOX. Sapienza. University of Iowa. References Ashbaugh.. S. Ribstein. H... M.capmktsreg.. researchers could focus on the implementation of SOX by the SEC and the PCAOB as well as changes in SOX implementation over time.. Mandated disclosure. Oyer. Grinstein. Northwestern University. These events likely offer tighter settings and hence could result in more progress.. Journal of Finance. Along those lines. in press.. 1960..M. American Enterprise Institute Press.cfmS. Greenstone.002..H. there is evidence that SOX has increased the scrutiny public firms face. Collins. T. Engel.. A lobbying approach to evaluating the Sarbanes–Oxley Act of 2002. Journal of Economic Perspectives 21. Dey. Quarterly Journal of Economics.. But the net effects on firms or the U. 2007. Baker.jacceco. Journal of Law and Economics 3. Wang. In the end.. M. H. University of Chicago and University of Michigan.H. A.. 2005. 751–782. Flannery. Investor sentiment in the stock market. we do not have much SOX-related evidence to support the conclusion that SOX has been excessively costly. University of Chicago and Northwestern University. Committee on Capital Market Regulation. . Working Paper. E.and post-Sarbanes–Oxley periods. Journal of Economic Perspectives 21 (2). Coates.. Chhaochharia. The Sarbanes–Oxley Act and firms’ going-private decisions. 399–460. stock returns. A.org/research.. B. Presently. DeAngelo. D. and that this effect has produced certain benefits. R. DC. DeAngelo. 2006. In fact. F.2006. 233–264. 2007). R.. J. 8–20.. Butler. Working Paper. Li. 2006. L... The State of U. Lafond. W. NYU.. 2007. Leuz. L. The problem of social cost.F.J. A. 2007. Kaplan. Going private: minority freezeouts and stockholder wealth. Working Paper. Working Paper.. as intended by Congress. Macroeconomic factors do influence aggregate stock returns.. economy remain unclear. Cohen...fei. A. M.1016/j.. 2006..org/404_survey_ 3_21_05.. B. 367–401. Wong. corporate governance: what’s right and what’s wrong? Journal of Applied Corporate Finance 15. 2002. 1–44. 2003.A. The effect of internal control deficiencies on firm risk and the cost of capital. Y. Hayes. The impact of Sarbanes–Oxley on cross-listed companies. Lys. Vissing-Jorgensen. C. 1984.07. Corporate governance and firm value: the impact of the 2002 governance rules.

02. Wysocki.S. 2006. T. 1. A. .-C. ARTICLE IN PRESS C. Journal of Accounting and Economics. Li. 2007.002. R.. Contemporary Accounting Research 23. Market reaction to events surrounding the Sarbanes–Oxley Act of 2002 and earnings management.. Jarrell. Journal of Accounting and Economics. Zhang.. L. 1981..senate. Litvak. C. Z. Rego. Leuz. D. Journal of Law and Economics..A. 2007. P. K.2007. Wang. Free cash flow and stockholder gains in going private transactions.. Triantis. Working Paper. G. Pincus... Rezaee. 2004. Trends and determinants of market liquidity in the pre.. companies cross-Listed in the US. P. Ribstein. The Sarbanes–Oxley of 2002 and security market behavior: early evidence. The Journal of Finance 44. Kim. Market vs. 613–675. Journal of Law and Economics 24. Romano. Brian-Low.. Poulsen. Companies complain about cost of corporate-governance rules. 2002. McKinsey and Company. S. 771–787. Jain. M. Sustaining New York’s and the US’ Global Financial Services Leadership /http://www. K. in press. The effect of the Sarbanes–Oxley Act on non-U. 2007. Why do firms go dark? causes and economic consequences of voluntary SEC deregistrations. regulatory responses to corporate fraud: a critique of the Sarbanes–Oxley Act of 2002.gov/schumer/SchumerWebsite/pressroom/special_reports/2007/NY_REPORT%20_ FINAL. University of Chicago and MIT. Solomon. P.pdfS. Journal of Corporation Law 28...1016/j. 2005. in press. The economic effects of federal regulation of the market for new security issues. Lehn. J.X.E. The Sarbanes–Oxley Act and the making of quack corporate governance. Economic consequences of financial reporting and disclosure regulation: what have we learned? Working Paper. 1989. 629–654. Working Paper...and post- Sarbanes–Oxley Act periods. doi:10.. 2007. H. A. 2006. Rezaee. I.O. Leuz / Journal of Accounting and Economics 44 (2007) 146–165 165 Jain. Economic consequences of the Sarbanes–Oxley Act of 2002. C...jacceco.. 2007.. Z. University of Texas School of Law. Wall Street Journal (February 10). Leuz. Yale Law Journal 114.. 1521–1561. 2006... C.