Sarbanes-Oxley studied

A study conducted by USC Law professors Ehud Kamar and Eric Talley with RAND economist Pinar Karaca-Mandic has found that small businesses were disproportionately affected by the Sarbanes-Oxley Act of 2002, a federal law that tightened financial reporting requirements for publicly owned companies.

In the first year after the law was enacted, smaller public companies were more likely to be purchased by private firms, which are not subject to the law, than by public firms, which are governed by law. This effect was dampened after five quarters, and there was no similar effect for large public companies.

“Our findings raise a host of new questions about the Sarbanes-Oxley Act,” said Kamar. “Did it provide benefits to companies that remained public to justify causing other companies to go private? Were the companies that went private prone to fraud? What is the effect of the law today? These are all questions that future research needs to answer.”

Congress passed the Sarbanes-Oxley Act in 2002 in the wake of the accounting scandals at companies such as Enron and WorldCom. The law makes significant changes in the governance, accounting, auditing and reporting requirements for firms traded in U.S. securities markets.

One key concern raised by Sarbanes-Oxley is whether the net cost of complying with regulations has driven businesses in general – and small firms in particular – to leave the public capital market and “go private.”

The study is the first to identify the effects of the new regulations by comparing the experiences of U.S.-based companies to businesses in other nations not covered by the accounting reforms.

“This trend could be interpreted in different ways,” said Talley. “Either it is a sign that Sarbanes-Oxley has created a burden on entrepreneurship, or it has provided some protection to investors by encouraging smaller firms with accounting problems to abandon public ownership.”

The study was conducted within the Kauffman-RAND Center for the Study of Regulation and Small Business, which is funded by the Ewing-Marion Kauffman Foundation. Titled “Going-Private Decisions and the Sarbanes-Oxley Act of 2002:  A Cross-Country Analysis,” the study is available by clicking here.