Thursday, June 21, 2007

SOX, IPOs and Corporate Risk-Taking: Part 1 of 3

A reader recently drew my attention towards the AEI seminar on SOX entitled "Is SOX impeding corporate risk taking?"

The seminar is a presentation of a paper of the same title by three authors from the University of Pittsburgh and includes critical discussions of the subject matter by three independent discussants whose research is in this area. (Funding for the paper was provided by AEI).

For those of us not located in Washington, D.C. or otherwise unable to attend, the AEI website has links to download the paper as well as links to the discussants' slides.

Here's what the study concludes: an extract from the abstract of the paper is below.

Many policymakers and corporate executives have argued that the Sarbanes-Oxley Act of 2002 ("SOX") has had a chilling effect on the risktaking behavior of U.S. corporations. This paper empirically examines this proposition. Using a large sample of U.S. and U.K. companies, we find that
i) compared with their U.K. counterparts U.S. firms have significantly reduced their R&D and capital expenditures and significantly increased their cash holdings since SOX.
ii) We also find that the equity of U.S. companies has become significantly less risky vis-à-vis U.K. companies since SOX.
iii) Finally, using a large sample of U.S. and U.K. initial public offerings ("IPOs"), we find that the likelihood that an IPO was conducted in the U.K. increased significantly after SOX and that this effect was especially high for firms in high R&D industries. Taken together, the results support the view that SOX has had a chilling effect on risk-taking
by publicly traded U.S. corporations.
(Numerals are mine)

In short, the paper concludes that SOX has led to reduced R&D expenditures among US firms, shares of US firms have become less risky, and finally the UK had a spike in the likelihood of IPOs post-SOX.

The question addressed is a very important and timely one. However some of the points made by the discussants indicate that the conclusions may have been premature.
Watch this space tomorrow for a dissection of the arguments against these conclusions!


Anonymous said...

As the anonymous reader who brought your attention to this event, I very much look forward to your views on the issue!

To add to what I'm sure will be an interesting discussion: one of the participants suggested that part of the problem was not specifically Sarbox, as much as new SEC listing requirements that were not legislated through Sarbox. For example, it was the SEC that decided that all companies seeking to go public must ensure that the majority of their board members be independent. These board members, it was suggested, being independent, are more likely to inhibit corporate risk-taking as they have less stake in the firm.

Sam said...

That's an interesting point, thank you. One tends to lump together the SEC listing requirements with Sarbox requirements. I will perhaps discuss this in a future post. Thank you for your very useful post ideas, and hope you keep reading!