How costly is the Sarbanes Oxley Act? Evidence on the effects of the Act on corporate profitability |
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| Authors: | Anwer S Ahmed Mary Lea McAnally Stephanie Rasmussen Connie D Weaver |
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| Institution: | 1. University of Tokyo, Department of Environmental Systems, 5-1-5, Kashiwanoha, Kashiwa-shi, Chiba-ken 277-8561, Japan;2. University of Tokyo, Department of Social Innovation, 7-3-1, Hongo, Bunkyo-ku, Tokyo 113-8656, Japan;3. University of Tokyo, Department of Technology Management for Innovation, 7-3-1, Hongo, Bunkyo-ku, Tokyo 113-8656, Japan;1. Department of Risk Management and Insurance, College of Economics, Shenzhen University, 3688 Nanhai Blvd., Nanshan District, Shenzhen 518060, Guangdong, China;2. Safeco Distinguished Professor of Insurance, Department of Finance and Management Science, Washington State University, PO Box 644746, Pullman, WA 99164-4746, USA;3. Department of Finance and Marketing, College of Business, California State University, Chico;1. Rotman School of Management, University of Toronto, Toronto, ON M5S 3E6, Canada;2. Johnson Graduate School of Management, Cornell University, Ithaca, NY 14853, USA;3. Fisher College of Business, The Ohio State University, Columbus, OH 43210, USA;4. National Bureau of Economic Research (NBER), Cambridge, MA 02138, USA;5. European Corporate Governance Institute (ECGI), Brussels, Belgium |
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| Abstract: | The Sarbanes-Oxley Act (SOX) was intended to protect investors by improving the accuracy and reliability of corporate disclosures. However, critics have argued that the costs of SOX far outweigh its intended benefits. Prior studies based on stock-price reactions to SOX-related events document mixed evidence on the expected impact of SOX. In contrast, we provide evidence on the net realized costs of SOX by examining its impact on operating profitability. We find that average cash flows decline by 1.3% of total assets after SOX. These costs are more significant for smaller firms, for more complex firms, and for firms with lower-growth opportunities. Annually, these costs range from $6 million for smaller firms to $39 million for larger firms. Further, we document that net SOX-related costs are not limited to one-time expenses associated with internal-control design and implementation. In aggregate, for the 1428 firms in our sample, these costs amount to about $19 billion per year. Profitability is lower for up to four years post-SOX. To our knowledge, ours are the first estimates of the realized net costs imposed by SOX. |
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