To read the full-text of this research, you can request a copy directly from the author.
Abstract
The American Competitiveness and Corporate Accountability Act of 2002, commonly referred to as the Sarbanes-Oxley Act (SOX), was legislated in response to corporate fraud and the resulting perception of an emerging imbalance between the investing public and publicly held companies. This paper reviews other initiatives concerned with corporate governance and some of the major provisions of SOX. Costs of compliance as well as benefits are addressed The impact of SOX on smaller public companies, including companies going private or dark, is discussed. The paper concludes with a look at the implications for not-for-profit organizations such as hospitals and universities.
These essays examine the impact of the Sarbanes-Oxley Act on small banks (Essay #1) and small businesses (Essay #2). Sarbanes-Oxley (SOX), passed in 2002 by the Congress of the United States, was intended to enhance the security of the public shareholder through extensive reporting and compliance programs. As some compliance costs are fixed, the costs of SOX would logically fall disproportionately upon smaller banks, possibly producing unintended consequences. These costs if significant may impact the bank’s choice of strategy. How then can the bank respond? The expectation of a negative impact on small banks is well documented, and consistent with this expectation I found that small public banks’ ratio of expense post Sox increased more than that of large public banks. However pretax earnings for small listed banks post SOX compared to pre SOX was indistinguishable from that of large banks, suggestive of coping strategies. However, I found that fewer small banks elected public reporting status post SOX, reflective of the higher perceived cost of public market membership and that a significant number of financial institutions elected to exit the public securities market. Turning to the impact on small businesses, while small banks had reduced capital accumulation post SOX on a scale similar to that of large banks, the business lending of small listed banks was significantly higher than that of large banks. Small businesses, which depend significantly upon small banks for their lending, are thus not potentially constrained in their growth efforts in the post SOX period, at least with respect to listed banks. I find, in contrast with the direct effect of the costs of SOX, a significant impact upon small banks making a capital market decision. The reduction in the number of banks electing public market membership is a shift in the small banking growth model and may suggest a future weakening in small banking support for small business. This research shows how the initial perception of legislation impacts capital market decisions and may create a long-term resource constraint downstream for dependent small companies, thus suggesting a potential future framework for the evaluation of intended regulation.
The number of firms going private is increasing at an unprecedented rate in the current decade. The ratio of companies going private to IPOs is in the 20%-30% range. My survey includes 110 of the 236 that went private between January 2001 and July 2003 (a 46.6 percent response rate). The cost of being public is the number one reason for going private by smaller firms. This relates directly to the passage of the Sarbanes-Oxley Act in 2002. A null hypothesis of no relationship between market capitalization and going private because of cost could be rejected at an alpha level of 0.01. Of significance is that a number of smaller firms actually went private under a Form 15 deregistration by reducing their number of shareholders to under 300, but without buying in the other shares outstanding. We now have a number of private companies with public shareholders holding the majority of the shares.
Kodak to Get Auditors’ Adverse View A.3. rResearch in Business and Economics Journal Fallout from Sarbanes Oxley, Page 8 BurnsInvestors Can Pay a Price as Small Firms ‘Go Dark
William M Bulkeley
Robert
Bulkeley, William M. and Robert Tomsho (2005). “Kodak to Get Auditors’ Adverse View.” Wall Street Journal, January 27, A.3. rResearch in Business and Economics Journal Fallout from Sarbanes Oxley, Page 8 Burns, Judith (2005). “Investors Can Pay a Price as Small Firms ‘Go Dark’.” Wall Street Journal, March 1, D.2
