Professor Bainbridge...on law, politics, religion, culture & food

SOX at 5 Years

At at the Federal Reserve Bank of Atlanta’s 2008 Financial Markets Conference, we’ve moved on to a panel on “SOX at 5.” (Shouldn’t that be “6”?) The keynote speaker is economist Ken Lehn. SOX co-author Michael Oxley is one of the panelists.

Lehn:

• SOX reform unlikely in near term.


• If reform does happen, firms conducting IPOs should be allowed to choose whether to comply with SOX. Because firms will structure IPOs to maximize proceeds, this market test would tell us a lot about whether SOX in fact is overall beneficial. (Opt out. or opt in?)


• Some firms have used leveraged stock repurchases to reduce their market float below $75 million, so that they are no longer accelerated filers and thus are not required (at present) to comply with SOX section 404.


• An SEC cost-benefit analysis of section 404 is forthcoming in June of this year, which will affect rulemaking to extend 404 application to microcaps.


• Event studies of SOX-related events mixed.


• Cross-sectional studies found that SOX had a negative impact on small, young, high growth firms.


• Most studies find that SOX had a negative impact on foreign firms cross-listed on US capital markets.


• Surveys and studies both suggest that corporate executives are less likely to take business risk post-SOX. Two papers (including one by Lehn) find that R&D spending declined post-SOX, suggesting that R&D funds were diverted to compliance costs.

Oxley then offered what I gather has become his standard defense: (1) my constituents made me do it and (2) it hasn’t turned out too badly. The latter is demonstrably disingenuous in light of the evidence Lehn recounted. As for the former, the admission that political expediency drove the process is a sad commentary on the extent to which the quest for perpetual incumbency has turned our modern politicians into spineless wimps. Whatever happened to the spirit of Edmund Burke: “Your representative owes you, not his industry only, but his judgment; and he betrays, instead of serving you, if he sacrifices it to your opinion.”?