ARTICLE IN PRESS

Journal of Accounting and Economics 44 (2007) 146165

www.elsevier.com/locate/jae

Was the SarbanesOxley Act of 2002 really this

costly? A discussion of evidence from
event returns and going-private decisions$
Christian Leuz
The Graduate School of Business, University of Chicago, Chicago, IL, USA
Available online 16 June 2007

Abstract

This paper discusses evidence on the costs of the SarbanesOxley Act (SOX) from stock returns
and going-private decisions. Zhang, [2007. Economic consequences of the SarbanesOxley Act of
2002. Journal of Accounting and Economics, doi:10.1016/j.jacceco.2006.07.002] analyzes returns
around legislative events and concludes that SOX imposes signicant costs on rms. Engel, et al.
[2007. The SarbanesOxley Act and rms going-private decisions. Journal of Accounting and
Economics, doi:10.1016/j.jacceco.2007.02.002] examine going-private decisions and point to
unintended consequences. Both studies are carefully conducted and deserve praise for tackling an
important issue. However, as my discussion highlights, several key ndings may not be attributable
to SOX and we should exercise caution in interpreting the evidence. While it is not implausible
that one-size-ts-all regulation imposes substantial costs on rms, we presently do not have much
SOX-related evidence to support this conclusion.
r 2007 Elsevier B.V. All rights reserved.

JEL classification: G14; G15; G38; G30; K22; M41

Keywords: Securities regulation; Event study; Disclosure; Corporate governance; Costbenet analysis;
Going private

$
I thank the editors (S.P. Kothari and Jerry Zimmerman), Luzi Hail, Steve Kaplan, Alex Triantis and Tracy
Wang for helpful comments on an earlier version. I also thank Jeff Ng for valuable research assistance.
Tel.: +1 773 834 1996.
E-mail address: Christian.Leuz@chicagogsb.edu

0165-4101/$ - see front matter r 2007 Elsevier B.V. All rights reserved.
doi:10.1016/j.jacceco.2007.06.001
 ARTICLE IN PRESS
C. Leuz / Journal of Accounting and Economics 44 (2007) 146165 147

1. Introduction

Ever since its passage, the merits of the SarbanesOxley Act of 2002 (SOX) have been
vigorously debated. Critics argue that SOX was hastily put together in response to several
high-prole corporate scandals and that it imposes substantial costs on rms without
commensurate benets (e.g., Ribstein, 2002; Solomon and Brian-Low, 2004; FEI, 2005;
Romano, 2005). More recently, there is concern that the U.S. capital market is losing its
leading position and competitiveness and that the regulatory burden of SOX is a driving
force behind this development.1 Contributing to this debate, two recent studies by Zhang
(2007) and Engel et al. (2007) examine the extent to which SOX has imposed signicant
(net) costs on rms. Both studies deserve signicant praise for tackling this timely and
important issue.
In this paper, I discuss these two prominent studies as well as related evidence on the
costs and benets of SOX. As the studies are carefully conducted, my discussion focuses on
the interpretation of the evidence and, in particular, the issue of whether their ndings can
in fact be attributed to SOX, rather than general market trends and concurrent events
(such as revised listing rules or other news). Towards this end, I also present new evidence
suggesting that we need to exercise caution in interpreting the results of both (and related)
studies.
The rst paper by Zhang (2007) examines stock price reactions to key legislative
events related to the passage and implementation of SOX. The idea is that stock returns
over key event days should reect rms expected private costs and benets of SOX.
She nds that the cumulative raw return of the U.S. market around key legislative
events is signicantly negative and large (about 15%). Benchmarking this return
against concurrent foreign market returns, she nds that the U.S. market return is more
negative. However, the raw return differential is much smaller, i.e., between 2% and
7.5% depending on the foreign market, and not always signicant. She also estimates
cumulative abnormal returns using market indices constructed from foreign rms without
U.S. listings and nds that the abnormal U.S. market return around key SOX events is
4.4% using stocks in Canada, Europe and Asia and almost 8% using stocks in Canada.
Overall, Zhang views her results as suggesting that SOX imposes signicant net costs
on rms.
As a next step, Zhang analyzes cross-sectional differences in the stock market reactions
across rms as an attempt to shed light on the private costs of particular SOX provisions
and hence the sources of the overall costs. She documents that rms cumulative abnormal
returns around the key SOX events decrease with the extent to which they purchase non-
audit services prior to the Act, have charters with weaker shareholder rights, more
extensive foreign operations and larger abnormal accruals. The associations with incentive
pay and rms lines of business are not or only weakly signicant. Zhang interprets
these cross-sectional results as consistent with her earlier ndings and the notion that the
SOX provisions on non-audit services, corporate responsibilities and internal controls
impose net private costs on rms. Lastly, she presents evidence that small rms for which
the compliance with SOX was signicantly delayed experienced signicantly larger

1
See for example the report by the Committee on Capital Market Regulation (2006), whose work was endorsed
by the U.S. Treasury Secretary Henry Paulson, and the report by McKinsey and Company (2007) commissioned
by New Yorks Mayor Michael Bloomberg and Senator Charles Schumer.
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148 C. Leuz / Journal of Accounting and Economics 44 (2007) 146165

abnormal returns. Again, this nding is consistent with the notion that SOX imposes
signicant costs.
If SOX is really as costly to rms as Zhang suggests, we would expect rms to engage in
avoidance strategies. The paper by Engel et al. (2006) (EHW) addresses precisely this issue
by analyzing rms going-private decisions around SOX as well as the market responses to
these decisions. The basic idea of their study is that rms can avoid the costs associated
with SOX by going private and that they will do so whenever the costs imposed by SOX
outweigh the benets generated by SOX plus any net benet from being public prior to
SOX.2 Based on this revealed-preference approach, EHW predict that SOX compliance
costs weigh more heavily for smaller rms due to their xed component and that SOX
provisions aimed at improving governance and making insider holdings less liquid are
likely to have smaller benets when rms are already well governed and insider holdings
are already relatively illiquid (see also Holmstrom and Kaplan, 2003). They also expect the
net benets of being public to be smaller for rms that are small, have thin trading volume
and low nancing needs.
EHW pose three research questions: Is SOX associated with an increase in going-private
transactions? Did rm characteristics associated with going-private decisions change
around SOX? Did the determinants of going private announcement returns change around
SOX? EHW provide evidence suggesting a higher incidence of going-private transactions
after SOX. They show that abnormal returns on key events increasing the likelihood of
SOX passage are positively associated with rm size and share turnover, suggesting that
SOX was more costly for smaller and less liquid rms. Lastly, they document that smaller
rms with greater inside ownership experience higher announcement returns to going
private after SOX, consistent with the notion that going private is likely to be most
benecial to rms with these characteristics. Overall, the evidence is consistent with the
predicted tradeoff between being public and going private and the authors hypotheses
about the effects of SOX on rms going-private decisions.
In summary, both papers provide interesting empirical evidence on an important topic.
They contribute to the literature by highlighting potential SOX costs. Zhang analyzes the
net costs to all U.S. rms, whereas EHW focus on rms that go private. While the latter
study seems less ambitious in scope, its evidence is quite important. It highlights that rms
typically can and will respond to costly regulation, which in turn leads to unintended
consequences. As such, EHW remind regulators to consider rms potential avoidance
strategies in designing and evaluating securities regulation.3
The subsequent discussion focuses on the interpretations of the ndings and the
conclusions we can draw from them. Let me begin by stating that it is not implausible that
massive, one-size-ts-all regulation imposes signicant costs on rms.4 It is generally
difcult for regulation to improve upon private contracting.5 Thus, from a conceptual
point of view, I am sympathetic to both studies. However, a key question is whether the
two papers present convincing evidence that SOX does in fact impose net costs on all or at
least a subset of U.S. rms.
2
Note that the latter net benet includes the costs of the going-private transaction itself.
3
Further examples are the studies by Jarrell (1981) and Bushee and Leuz (2005).
4
Whether SOX is in fact one-size-ts-all regulation is debated among legal scholars (see Butler and Ribstein,
2006; Coates, 2007).
5
The basic idea goes back to Coase (1960). See Leuz and Wysocki (2007) for a survey of the literature in the area
of disclosure regulation.
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C. Leuz / Journal of Accounting and Economics 44 (2007) 146165 149

The main problem in assessing the net effects of SOX using stock returns is that the act
was imposed on (essentially) all U.S. publicly-traded rms and hence it is difcult to nd a
control group of rms that is (a) not affected and (b) comparable to U.S. rms.6 The lack
of a proper control group is the main (but not the only) reason why it is not clear that
Zhang can really attribute the large negative returns around key legislative events to SOX.
The use of concurrent foreign market returns as a benchmark mitigates but in my view
does not resolve the issue (despite the fact that it signicantly attenuates her results).
To illustrate my point, I conduct a simple analysis of news articles and show that the key
legislative events are days with major economic and political news. If foreign markets were
equally affected by these news events, adjusting for foreign market returns would solve the
issue. However, I argue that this is unlikely and present evidence that the event days are
likely to be contaminated by news that are more relevant to U.S. than foreign rms (e.g.,
about the impending war in Iraq or the creation of the Department of Homeland Security).
Furthermore, I show that the Chicago Board of Trades volatility index (VIX) increases
substantially around the passage of SOX, consistent with a general decline in investor
sentiment. This evidence suggests that we have to be very careful about attributing
negative returns over this time period to SOX, unless we have reasons to believe that SOX
is responsible for the increase in market uncertainty (despite the fact that it was intended to
counteract the loss in investor condence). My nal comment on Zhangs study is that it is
difcult, if not impossible, to separate the effects of particular SOX provisions using cross-
sectional analyses of the event returns. SOX was debated and passed as a package of
complementary provisions and there are no event dates that could be assigned to specic
provisions alone.
Turning to the interpretation of EHWs ndings, I rst discuss the denition of going
private and point out that there are different types of SEC deregistrations. Some rms
deregister from the SEC, but continue to trade publicly in the OTC markets. Other rms
discontinue trading and become a private company. The former group is merely going
dark, which is very different from going private (Leuz et al., 2007). Once EHW exclude
going-dark rms, there is no signicant spike in going-private activity right after the
passage of SOX. Leuz et al. (2007) document that the observed increase in deregistrations
after SOX stems from going-dark rms. In this discussion, I also show that there is a
marked increase in going-private activity since 2005, particularly with respect to deal
volume. However, this spike is likely to be attributable to the recent private-equity boom
and the availability of debt for going-private transactions, rather than SOX. Consistent
with this conjecture, I show that the rest of the world exhibits similar time-series patterns in
going-private and buyout activity as the US.
My second comment pertains to the interpretation of positive returns to going-private
announcements. EHWs primary interpretation is that positive returns are indicative of net
SOX costs that rms avoided by going private. This interpretation follows from their
conceptual framework and the argument that by revealed preference the net benets from
being public are positive or at least non-negative. However, this interpretation implies that
the net costs of SOX are very large and on average 23% of rms market capitalization. An
alternative explanation is that going private has positive benets because the net value of

6
There are a number of studies that analyze the effects of SOX on foreign rms (e.g., Berger et al., 2006; Litvak,
2006). As discussed in Section 2, these studies have a smaller benchmark problem, but it is not clear that we can
extrapolate their ndings to U.S. rms.
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being public is negative for these rms, possibly due to some unresolved agency problems
between the controlling insiders and the minority shareholders. In this case, not all the
announcement returns are attributable to SOX costs. To the contrary, this interpretation
suggests that SOX induces some rms to go private and in the process unlocks value for
the minority shareholders of these rms.
Along these lines and to round out the discussion, I review studies documenting that
SOX has increased the amount of scrutiny leveled on rms, as the policy makers intended,
and has delivered some benets. But again, we have to be careful in interpreting these
ndings. They do not provide evidence on net benets to rms and do not imply that SOX
was benecial overall. We need more research on these important issues. But rather than
focusing on the overall costs and benets of SOX, which is fraught with many empirical
difculties, we are likely to make more headway by studying the implementation of SOX
and its subsequent amendments.
The remainder of the paper is organized as follows. Section 2 discusses the main ndings
in Zhang (2007) and the question of whether the negative event returns are attributable to
SOX. In Section 3, I discuss the main ndings in Engel et al. (2006) and the question of
whether rms go private in response to SOX. Section 4 concludes.

2. Are the negative event returns presented in Zhang (2007) attributable to SOX?

Zhangs main result is that the cumulative raw and abnormal returns around key SOX
events are signicantly negative, which she interprets as evidence that SOX imposes
signicant net costs on rms. The negative cumulative return to the SOX events is driven
by three signicantly negative event windows: February 2, July 812, and July 1823. The
value-weighted raw returns for U.S. stocks on those days are 3.0%, 6.3% and 11.9%,
respectively. In addition, there is a window with a signicantly positive (raw) return: July
2426 (6.1%). Zhang argues that on these days the agreement on the nal rule eliminated
concerns about even tougher rules and hence that the positive returns are consistent with
SOX being costly to rms.
Zhangs event dates are meticulously researched and she is also very careful in assessing
the signicance of the event returns. However, her main conclusion and the sign of the
cumulative return are fairly sensitive to the choice of event dates. Two competing studies
by Rezaee and Jain (2006) and Li et al. (2007) choose slightly different event days and nd
that the cumulative event return to SOX is signicantly positive. Consequently, they
suggest that SOX was benecial to rms.
The key problem for all the three event studies is that SOX applies to all exchange-listed
and SEC-registered U.S. rms. Thus, a natural control group of comparable, but
unaffected U.S. rms does not exist.7 This shortcoming makes it difcult to remove
market-wide effects that are unrelated to SOX. In addition, SOX events are clustered in
time and extend over several days. In fact, three of the four key legislative events are in July
2002 and Zhangs event windows cover all but three trading days in the second half of July.
This setting is in stark contrast to the typical event study where not all rms are affected
and event days are dispersed in time, both of which facilitates washing out other effects
7
One alternative would be to use U.S. rms in the OTC markets (e.g., Pink Sheets) that are not subject to SEC
disclosure regulation as a benchmark. However, these rms tend to be fairly small and the OTC markets are much
less liquid than the regular U.S. exchanges (see, e.g., Bushee and Leuz, 2005).
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C. Leuz / Journal of Accounting and Economics 44 (2007) 146165 151

and isolating the event return. To make matters worse, NYSE and NASDAQ changed
their listing requirements in response to the corporate scandals around the same time SOX
was passed. As a result of all these issues, I do not think that we can draw any inferences
with respect to SOX from the raw market return. Besides, the magnitude of the cumulative
raw return is very large and it seems implausible that SOX destroyed 15% of the U.S.
market capitalization.8
Zhang recognizes that market returns over the event days capture other news. To
address this issue, she searches for confounding news events using the following terms:
federal legislation, federal regulation, scandals, and securities fraud. She nds several
confounding events and uses intra-day returns to assess the impact of these events. Zhang
also analyzes quarterly earnings releases to check whether negative earnings news cluster in
July 2002. She nds that earnings news in July were generally more positive than the rest of
the year, except for 3 days where the proportion of negative and positive news is roughly
even (all of which fall into the key event windows). Based on these analyses, she dismisses
that other concurrent rulemaking activities, news about the accounting scandals or
earnings news drive her results.
Even if this conclusion were correct, note that the problem of confounding news events
is not limited to other rulemaking activities and earnings news. Event returns could also be
affected by broad stock market trends and major macroeconomic or political news. To get
a sense for this problem, I conduct a simple analysis of headline news over the four
signicant event windows reported in Zhangs Table 2. I restrict the analysis to the daily
news summary provided in the New York Times (NYT) for two reasons. First, using this
news summary makes picking major headlines less subjective. Second, the NYT is more
geared towards political news and big-picture economic news than business newspapers
and hence well suited for my purposes. However, an (admittedly more subjective) analysis
of major news events and headlines in the Wall Street Journal over key legislative events
does not change my conclusions below.
Table 1 reports several NYT headlines as well as quotes from the news summaries as
examples. It is obvious that the key legislative event windows are also days with major
political and economic news. The headlines refer to extensive military spending, the
impending war in Iraq, threat from terrorism, the creation of the Department of
Homeland Security, negative macroeconomic news, fears about a recession, and a massive
decline in the stock markets. The corporate scandals in the U.S. and the legislative
response to these scandals are also mentioned. The latter is generally cast in a positive
light. Interestingly, fears of a legislative overreaction to the scandals or concerns about
costly regulation are not once discussed in these news summaries.
Considering these confounding news events, the general market trend at the time, and
the length and clustering of Zhangs event windows, it seems obvious that we cannot
simply attribute the raw market return for U.S. rms to SOX. In response to these
concerns and the conference discussion, Zhang uses foreign market returns in Canada,

8
As a potential explanation for this magnitude, Zhang discusses that the market reaction may also reect
expectations about future anti-business legislation. While it is possible that, at the time, the equilibrium between
anti-business and pro-business lobby groups shifted, I nd it implausible that this shift had a lasting effect and
hence explains the large negative reaction. Costly anti-business regulation is often followed by pro-business
regulation (or amendments). Recent developments easing the burden of SOX support this conjecture.
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152 C. Leuz / Journal of Accounting and Economics 44 (2007) 146165

Table 1
Economic and political news in the U.S. and around the world on key legislative events related to the passage of
SOX

Event Date Page Headline Quotes

1 2/2/2002 A1 A nation challenged: The Bush administration wants to increase

Bush seeking big rise the Pentagons yearly budget by $120
in military spending billion over 5 years, to $451 billion in 2007,
according to Defense Department
documents

1 2/2/2002 C1 Economy remains The unemployment rate fell to 5.6% from

weak 5.8% in December, but economists called
the drop a mirage. Consumer condence
and manufacturing declined slightly. [y]
Auto sales in the United States fell 5.1
percent in January compared with the same
month a year earlier
14 7/8/2002 A1 Congress to debate The federal government begins to
plan for a new reorganize itself in earnest this week to
security agency respond to a new world of terror and
domestic unease, as Congress returns from
recess to a dizzying round of votes on
creating a Department of Homeland
Security by summers end
14 7/8/2002 A1 Economy still Scandals continue to crash through
pushing ahead executive suites. The threat of terrorism
hangs in the air. Stock markets have
tumbled. And through it all, the economy
has pushed forward, to the surprise of a
number of analysts. To many economists,
the recoverys stamina depends on whether
the falls from grace in corporate America
continue long enough to dent consumers
resilience
14 7/10/2002 A1 US considers Wary American military planners are considering
Jordan as base for using bases in Jordan to stage air and
attack on Iraq commando operations against Iraq in the
event the United States decides to attack,
senior defense ofcials said

14 7/11/2002 C9 The bear market The S& P 500 and the Nasdaq sunk to their
worsens lowest levels since 1997
16 7/18/2002 A1 Congress presses on Democrats and a growing number of
Iraq plan Republicans want the White House to
provide a public accounting of plans for
ousting Saddam Hussein
16 7/19/2002 A1 House committees House Republican leaders said they would
overruled give the administration almost all it wanted
in a new Department of Homeland
Security, short-circuiting committee efforts
to maintain jurisdiction over agencies by
keeping them out of the new department
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C. Leuz / Journal of Accounting and Economics 44 (2007) 146165 153

Table 1 (continued )

Event Date Page Headline Quotes

16 7/19/2002 A3 Bush renews rst- President Bush assured troops just back at
strike vow Fort Drum, N.Y., after serving in
Afghanistan that the United States would
preemptively strike countries developing
weapons of mass destruction
16 7/20/2002 A1 Stocks tumble again Stocks continued their plunge yesterday in
a four-month rout that has sent the major
indexes below their lows of last September
and to levels that, if they hold, will make
this the worst year for the market since the
1970s
16 7/21/2002 A1 Bush economic team President Bushs economic team is facing
faulted criticism for not responding sufciently to
growing economic and political pressures.
[y] By the end of last week, the investor
trust on which the bull market of the 1990s
had been founded seemed to have almost
entirely vanished

16 7/22/2002 A1 WorldCom les for WorldCom, the telecommunications

bankruptcy company hurt by an accounting scandal
and a rapid erosion of its prots, has
submitted the largest bankruptcy ling in
United States history

16 7/23/2002 A1 Stock prices continue The stock market fell sharply again, as
to fall investors seemed to fear a slowdown in the
world economy and shrugged off President
Bushs statement that there is value in the
market now
17 7/24/2002 A15 Opposition to Many House Democrats are considering
security bill voting against the proposed Department of
Homeland Security tomorrow, citing
ideological differences with some
Republican provisions
17 7/25/2002 A1 Deal on corporate House and Senate negotiators agreed on an
crackdown overhaul of corporate fraud, accounting
and securities laws. Final approval is
expected in days, and President Bush says
he will sign it
17 7/25/2002 A1 Stocks break losing The Dow surged 488 points, or 6.4 percent,
streak to 8,191.29. The S.& P. 500 gained 5.7
percent

This table presents key headlines from daily New York Times news summaries published on key legislative
event dates. The table focuses on the four event windows that exhibit signicant event returns (see Zhang, 2007,
Table 2). The rst column below refers to the event number in Zhang (2007), the next two columns provide the
date and page of the news article. The fourth column gives the headline and the last column provides salient
quotes from the articles.
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Europe and Asia to adjust U.S. market returns.9 Simply subtracting returns in these
foreign markets from the U.S. market return substantially reduces the cumulative
abnormal return to SOX and renders it often insignicant. But the cumulative abnormal
return remains negative in all cases and in many cases is still fairly large in magnitude
( 2% to 7.5%). To account for the fact that foreign stocks likely react differently to
global news than U.S. stocks, Zhang estimates abnormal U.S. market returns from a
market model with foreign returns and nds that the cumulative abnormal return to SOX
is still negative and between 4.3% and 8.0%.
These adjustments are clearly an improvement, but they are unlikely to address concerns
about confounding news events in the U.S. markets. Benchmarking with foreign returns
can take out worldwide news and global market trends. However, as Table 1 shows, there
are many news events that are fairly specic to the U.S. but unrelated to SOX (e.g., news
about U.S. military spending, the U.S. strategy with respect to Iraq, the Department of
Homeland Security). These news events remain a substantial concern.
In addition, I am concerned that the cumulative abnormal return to SOX simply reects
the massive and general downward trend in the U.S. equity markets in July 2002, as most
of the key event windows fall into this month. Again, benchmarking with foreign returns
helps with respect to this concern, but it is unlikely to solve the problem. Several of the
news articles in Table 1 indicate that the U.S. market was leading the downward slide in
equity markets around the world.
To illustrate my concern about the effects of a general market trend in July 2002,
I examine the VIX for the S&P 500. This index is a measure of market expectations of
near-term volatility conveyed by S&P 500 stock index option prices and widely used
barometer of investor sentiment (Baker and Wurgler, 2006). Table 2 reports the average
VIX levels for various intervals. Panel A reports the yearly averages from 2000 to 2002,
mainly for benchmarking purposes. It shows that the volatility index is generally below
30%. Panel B reports weekly averages for the VIX and shows that key SOX events fall into
a time period that exhibits a volatility spike that is comparable to the volatility spike following
the events of September 11, 2001. It is unlikely that the passage of SOX is responsible for this
increase in volatility, even if SOX entails major net costs to rms. If anything, the news
summaries in Table 1 refer to articles that view legislative progress on SOX as reducing
uncertainty and restoring condence in corporate reporting. Conrming this impression, Jain
et al. (2006) report that bid-ask spreads widened before SOX and then fell dramatically
over the 9-month period following the passage of SOX (see also Coates, 2007).
Similarly, Panel C shows that the increase in market volatility was sustained through
September 2002 and then starts declining. Thus, the volatility spike is not isolated to the
legislative events leading to the passage of SOX.10 To me this evidence suggests that a large
portion of the event returns is driven by broad changes in the economic outlook and
general macroeconomic uncertainty at the time. Thus, in sum, it is not clear what we can

9
The conference version adjusted the U.S. market returns using a macroeconomic model following Flannery
and Protopapadakis (2002). However, the explanatory power of the model was extremely small, so that the
abnormal market return essentially reected the raw U.S. market return.
10
In footnote 13, Zhang reports that including implied volatility indices for the FTSE100, S&P500, and TSE60
in her abnormal foreign returns model does not alter her inferences. While this nding is reassuring, my concern is
not limited to daily innovations in these indices. I use the VIX simply to show that the passage of SOX falls into a
very volatile and uncertain market period.
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C. Leuz / Journal of Accounting and Economics 44 (2007) 146165 155

Table 2
Trends in the volatility index (VIX) for the S&P 500

Frequency (Year, Month, Week) Time period Average VIX

Panel A: Yearly averages

2000 1/01/200012/31/2000 23.32
2001 1/01/200112/31/2001 25.75
2002 1/01/200212/31/2002 27.29
Panel B: Weekly averages around 9/11/2001 and SOX-related events
Week 1 (911) 9/04/20019/07/2001 27.95
Week +1 (911) 9/17/20019/21/2001 41.52
Week +2 (911) 9/24/20019/28/2001 34.95
Week 1 (SOX) 7/01/20027/05/2002 28.15
Event 14 (SOX) 7/08/20027/12/2002 31.87
Event 15+16 (SOX) 7/15/20027/19/2002 36.08
Event 16+17 (SOX) 7/22/20027/26/2002 40.29
Week +1 (SOX) 7/29/20028/02/2002 34.70
Panel C: Monthly averages around 9/11/2001 and SOX-related events
Month 1 August 2001 21.86
911 September 2001 35.07
Month +1 October 2001 35.24
Month +2 November 2001 26.63

Month 1 June 2002 25.27

SOX July 2002 34.05
Month +1 August 2002 33.74
Month +2 September 2002 37.65

This table presents averages for the S&P 500 volatility index (VIX) from the Chicago Board of Trade. Panel A
presents the average levels in 2000, 2001 and 2002. Panel B presents the averages for the weeks before and after the
event of 9/11/2001 as well as the key legislative SOX events from Zhang (2007). Panel C reports averages for the
months around September 2001 and July 2002.

conclude from the negative returns around key SOX events, with or without the market
adjustment using foreign stock returns.
My second major comment applies to the cross-sectional analysis of SOX event
returns. Zhang views this analysis as shedding light on the costs of individual provisions.
She nds that rms cumulative abnormal returns around the key SOX events
decrease with the extent to which they purchase non-audit services prior to the Act,
have charters with weaker shareholder rights, more extensive foreign operations and larger
abnormal accruals.11 Based on these ndings, she concludes that the cross-sectional
analysis rejects the hypothesis that three major provisions entail no net costs to rms,
providing additional support for the hypothesis that the market initially expected SOX to
be costly.

11
However, the event-by-event analyses show that the signs of the associations with various rm characteristics
are often not robust, particularly not for the earlier event dates (see Zhang (2007), Table 5, Panel B).
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156 C. Leuz / Journal of Accounting and Economics 44 (2007) 146165

While I agree that, in principle, assessing the impact of specic provisions is important,
it is difcult to disentangle the effects of individual provisions on the event returns.
SOX was passed as a package of provisions and there appear to be few event days where
only particular provisions were debated, changed or added. Thus, it is not clear to me that
we can interpret the cross-sectional results as evidence on the costs (or benets) of
particular provisions. In my view, these tests are more likely to provide sensitivity checks
with respect to Zhangs general conclusion that the negative cumulative return for
all rms indicates that SOX imposes net costs on the U.S. rms. That is, if we can
nd rms that a priori are more (or less) likely to be negatively affected by SOX, showing
that these rms indeed experience more (less) negative abnormal returns should help
with the identication of SOX effects and increase our condence in the results.12
However, this identication strategy relies crucially on our ability to identify rms that are
(without much doubt) more negatively affected by SOX and, at the same time, not also
more negatively affected by the other concurrent news events over the passage of SOX.
However, nding such rms is not trivial. Even studies by Chhaochharia and Grinstein
(2007) and Hochberg et al. (2007), which use innovative SOX-related characteristics
(e.g., whether rms are in compliance with SOX provisions or lobbied against SOX),
need further rm characteristics such as rm size or the quality of governance to interpret
their ndings.
One of the problems is that the optimal levels of internal controls, corporate governance
or non-audit services differ across rms, which in turn makes the effect of SOX hard to
predict. It is plausible that excessive provisions are more costly for rms that already have
good internal controls and governance, as Zhang argues (see also Holmstrom and Kaplan,
2003). But this is not necessarily true. It is also conceivable that rms, for which strong
formal internal controls are optimal, nd it easier to deal with the additional SOX
requirements than rms, for which fewer and less formal controls are optimal. In this case,
the cross-sectional prediction reverses. In order to address this problem, we would have to
identify the SOX effects relative to rms optimal governance and internal control
structures, rather than along the same continuum for all rms.13 This is obviously difcult,
if not impossible, to do.
Furthermore, even if we were able to create such a classication and found that it is
positively associated with rms cumulative abnormal returns to key SOX events, we
would have to be careful about what we conclude from this nding. It would indicate that
SOX was more costly for rms with this particular rm characteristic, but it would still be
possible that SOX as a whole has net benets. The reverse would hold for negative
relations. Suggesting that there are both winners and losers, Chhaochharia and Grinstein
(2007) provide evidence that large rms that are less compliant earn positive abnormal
returns but small rms that are less compliant earn negative abnormal returns around
key SOX events. Thus, in my view, there are clearly limits in how far we can take the
cross-sectional results.
Let me conclude this section by stating that I would not be surprised if SOX imposed
signicant net costs on at least some rms. Prior work on disclosure regulation shows that

12
This is in essence the identication approach in Chhaochharia and Grinstein (2007) and Hochberg et al.
(2007).
13
However, outright prohibition of certain practices, such as executive loans or non-audit services, may offer
clearer predictions in this regard, as it seems unlikely that the optimal level for these practices is zero.
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C. Leuz / Journal of Accounting and Economics 44 (2007) 146165 157

it is difcult for regulators to improve upon private contracting.14 We also have evidence
that one-size-ts-all disclosure regulation can be costly for many rms (e.g., Jarrell, 1981;
Bushee and Leuz, 2005). But as Coates (2007) points out, it is not clear that SOX is
appropriately described as one-size-ts-all regulation, given that much of its implementa-
tion was delegated to the SEC and the Public Company Accounting Oversight Board
(PCAOB). He argues that the costs of SOX are subtle and likely to stem from incentives to
overspend on internal controls, rather than the SOX provisions per se. That is, the problem
may be that managers and directors bear only a small fraction of the compliance costs but
share disproportionately in a liability from control deciencies.
However, there is evidence that SOX is costly to particular groups of rms. The studies
by EHW and Leuz et al. (2007) fall into this category. More closely related to Zhangs
study, Berger et al. (2006) and Litvak (2006) assess the impact of SOX on foreign rms that
are cross-listed on U.S. exchanges, relative to U.S. rms and foreign rms, respectively.
Berger et al. (2006) nd that the value-weighted portfolio of cross-listed foreign rms has a
signicantly more negative stock price reaction to SOX than the value-weighted U.S.
market, suggesting that SOX has been costly to foreign rms. Similarly, Litvak (2006) nds
that foreign rms that are subject to SOX react more negatively than either matched cross-
listed foreign rms that are not subject to SOX or non-cross-listed foreign rms. Zhang
conrms both of these ndings in her sensitivity analyses.
In my view, the ndings for foreign rms are easier to interpret than Zhangs results for
two reasons. First, as Berger et al. (2006) point out, the inclusion of foreign rms in SOX
was more of a surprise than an intention and the issue was discovered on the last day of the
Senate debate. This feature implies that they can use a more sharply dened event window
that is less susceptible to other concurrent news events. Second, there are more natural
control groups for foreign rms. We can use matched rms from the same country or even
matched rms from the same country that are also cross-listed on U.S. markets but not
subject to SOX (e.g., Litvak, 2006). To the extent that these rms are affected similarly by
confounding news events but differentially by SOX, the event returns should reect the net
costs and benets of SOX.
Thus, as the results in Berger et al. (2006) and Litvak (2006) are consistent with Zhangs
ndings, they can be viewed as corroborating her conclusion that SOX imposes net costs
on rms. However, it is of course an open question whether or not we can extrapolate the
ndings for foreign rms to U.S. rms. For instance, it is conceivable that foreign rms
are affected more negatively if SOX compliance creates contradictions with foreign
governance regulation.
Given the problems in properly identifying SOX effects, Hochberg et al. (2007) use
lobbying behavior of corporate insiders as a way to identify rms that are more likely to be
affected by SOX. They demonstrate that rms whose insiders lobbied against a strict SOX
implementation experience signicantly positive abnormal returns over the passage of
SOX, relative to rms that did not lobby (and hence are deemed less affected). They
interpret this result as suggesting that SOX improves the disclosure and governance of
lobbying rms and that SOX benets outside shareholders. This approach is similar in
spirit to Zhangs cross-sectional analyses, which also tries to identify rms that are more
negatively affected by SOX. The advantage of using lobbying behavior, however, is that it
relies on observable behavior that is more directly related to SOX. That is, the set of rms

14
See, e.g., the survey by Leuz and Wysocki (2007).
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158 C. Leuz / Journal of Accounting and Economics 44 (2007) 146165

that wrote letters against a strict implementation of SOX is well dened compared to the
approach in Zhangs study that uses various rm characteristics.15
But of course the set of lobbying rms is likely to be small and probably not
representative. Moreover, we still need rm characteristics to aid our interpretation of the
ndings. For instance, the conclusion that SOX has been benecial to outside shareholders
of lobbying rms is more plausible if there is evidence that these rms are poorly governed
or that insiders of these rms consume more private control benets at the expense of
outsiders. Without such evidence, the documented return differential could also reect that
lobbying rms are better governed rms and hence better able to cope with SOX or that
better performing rms have more time to lobby. In the end, as noted above, the
interpretation of cross-sectional differences in abnormal SOX returns hinges critically on
having convincing predictions on how SOX has differentially affected rms.
In sum, we can conclude that there is return-based evidence that SOX imposes net costs
on particular groups of rms (e.g., smaller rms), but little evidence on net SOX costs to all
U.S. rms or the economy as a whole.

3. Do rms go private in response to SOX?

A different approach to assessing the costs (or benets) of SOX is analyzing rm

behavior and, in particular, rms avoidance strategies. EHW essentially take this
approach. They begin with the basic observation that rms can avoid the costs associated
with SOX by going private whenever the incremental costs imposed by SOX outweigh its
benets plus any net benet from being public prior to SOX. This framework provides a
nice structure for their analysis and a number of plausible empirical predictions, which I
have summarized in the introduction.
The rst question with respect to EHWs study is whether SOX is in fact associated with
an increase in going-private activity. EHW present evidence to this effect in their Table 1.
However, in interpreting this evidence, it is important to consider the denition of going
private. EHW follow the SECs denition and restrict their sample to Rule 13e-3 going-
private transactions, which are transactions initiated by afliates (i.e., insiders or entities)
that take the number of shareholders below 300 and allow the rm to deregister from
the SEC.16 This denition has been commonly used in the literature (e.g., DeAngelo and
DeAngelo, 1984; Lehn and Poulsen, 1989), but it is problematic for several reasons. First,
it includes rms that simply perform a reverse-stock split as well as rms that deregister
from the SEC but continue to trade in the Pink Sheets. Second, it ignores rms that have
already fewer than 300 record holders and hence do not have to le Schedule 13E-3 but
nevertheless decide to go private.
In my view, going private is a change of organizational form. It involves a re-
capitalization or concentration of ownership and it implies that the rm is no longer
publicly traded. However, the SECs denition and EHWs sample construction do not
differentiate between rms that continue to trade and those that do not. Leuz et al. (2007)
argue that the former group of rms is more appropriately viewed as going dark, rather
15
Of course, rms can lobby in other ways that are less observable to researchers. However, not identifying
these rms is likely to make it harder to nd signicant differences relative to the control group.
16
Strictly speaking, the rule refers to rms holders of record and not the benecial shareholders. Record holders
are counted at the level of the intermediary (for more discussion of this issue see Leuz et al., 2007).
 ARTICLE IN PRESS
C. Leuz / Journal of Accounting and Economics 44 (2007) 146165 159

than going private, because these rms primarily terminate their obligation to provide
nancial statements, but remain publicly traded.
The distinction is not just a semantic issue. It matters both conceptually and empirically.
First, the distinction matters because it highlights that rms can respond to costly
regulation in multiple ways. As EHW also note, going-private strategies are not
homogenous. Second, it matters because the stock market responds very differently to
going-private and going-dark announcements. The former announcements usually result
in large positive reactions, while the latter announcements lead to signicantly negative
reactions (Leuz et al., 2007). Similarly, EHW show that going-private announcement
returns are much smaller for transactions involving reverse-stock splits and small
shareholder purchase offers. Given their going-private denition, these transactions likely
comprise many of the going-dark rms (see their Table 9).
Furthermore, Leuz et al. (2007) show that going-dark rms are smaller, more distressed,
have weaker performance and governance than going-private rms. Thus, going dark and
going private are economically very different, which is important with respect to the
conclusions that we draw from nding that SOX has fueled either trend. That is, we would
probably be much less concerned about a SOX effect on relatively small and distressed
rms than we would be about an effect on larger, well-performing and growing rms.
The denition of going-private rms primarily affects EHWs analysis of going-private
trends but has little impact on the other ndings.17 That is, the increase in going-private
decisions per quarter is no longer statistically signicant once rms that continue to trade
in the Pink Sheets are removed from their sample (EHW, footnote 15). As Leuz et al.
(2007) show, the increase in SEC deregistrations after SOX is primarily driven by rms
that go dark, rather than private. Going-dark decisions increase immediately after the
passage of SOX and their monthly frequency closely tracks events related to the
implementation of SOX, such as extensions to the compliance with Section 404 (Leuz
et al., 2007, Table 6). This pattern is suggestive of a SOX effect. In contrast, there is no
signicant increase in going private in the months immediately following SOX.
These ndings may be surprising in light of all the anecdotal evidence that going-private
activity has signicantly increased over the last few years. To reconcile this issue, I examine
buyout and going-private trends over a longer window, i.e., from 1999 to 2006. I collect
data from Thomson Financial Banker One on all M&A deals around the world that are
announced between 1/1/1999 and 12/31/2006 and classied as either a going-private,
management buyout (MBO) or leveraged buyout (LBO). Note that this classication in
Thomson Financial does not map into the going-private denition used in EHW.18 For
instance, EHW carefully eliminate cases where the acquirer is a foreign company and
where the target is in bankruptcy or liquidation. While eliminating these rms is desirable

17
EHWs other results are less affected because not many going-dark rms enter their regression analyses. For
these analyses, EHW impose further data restrictions, which make the sample biased towards larger, exchange-
traded rms with coverage in CRSP. Also, note that several tests include controls for transaction type or Pink
Sheet trading. EHW explicitly report that, with the exception of their Table 1 results, inferences are robust to
dropping the remaining going-dark rms.
18
I include all three types of buyouts as the distinctions in Thomson Financial appear to be somewhat arbitrary.
According to Thomson Financial, the Going Private Flag indicates that a private acquirer or a nancial
sponsor is acquiring a public target and upon completion, the target will no longer have any of its shares traded on
the public market. However, given the denitions for LBO and MBO, it seems that a going-private transaction
could also be classied as an LBO or MBO if it was highly leveraged or involved management.
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160 C. Leuz / Journal of Accounting and Economics 44 (2007) 146165

in assessing the impact of SOX, I simply intend to illustrate time trends in buyout activity
around the world. Towards this end, I eliminate duplicate deals and entries involving the
same buyout transaction. I then aggregate the data into three country groupings: the U.S.,
the UK, and the rest of the world.
Table 3 presents the number of deals, the total US$ transaction value and the average
deal size in US$ for each year and the three country groupings. Panel A includes all three
types of buyout transactions whereas Panel B is restricted to deals classied as going-
private transactions. Panel A shows a dramatic increase in buyout activity for the U.S.,
particularly in 2005 and 2006, consistent with anecdotal evidence. This increase is present
in the number of deals and the total transaction volume, but it is much more pronounced

Table 3
Buyout- and going-private patterns around the world

Year US UK Rest of the world

No. Transaction Average No. Transaction Average. No. Transaction Average

of value deal of value deal size of value deal size
deals in $ size in $ deals in $ in $ deals in $ in $

Panel A: All buyout deals

1999 283 38,614 197.01 504 25,419 77.03 577 31,510 100.35
2000 416 43,112 170.40 443 28,412 102.20 696 31,165 97.39
2001 256 15,964 102.33 415 19,928 87.02 587 33,467 125.34
2002 264 29,212 198.72 346 19,723 106.61 510 60,650 237.84
2003 272 28,707 164.04 387 37,480 173.52 618 49,838 156.23
2004 383 79,319 406.76 377 27,491 147.01 614 73,413 260.33
2005 552 118,697 505.09 340 42,602 215.16 816 123,548 346.07
2006 745 387,288 1,304.00 324 82,514 539.31 1028 225,342 495.26

Increase in 3-year average pre- and 26 132 129 19 46 101 10 157 136
post-SOX (in %)

Panel B: Going-private deals

1999 113 17,669 165.13 66 9,813 150.96 125 13,045 117.53
2000 117 18,666 169.69 56 9,503 169.70 151 11,093 80.97
2001 92 9250 102.77 36 3,388 94.11 133 12,129 101.08
2002 98 11,765 133.70 29 2,680 92.41 145 29,096 225.55
2003 128 10,899 94.78 39 17,753 467.17 183 15,859 104.34
2004 85 39,609 471.53 22 4,555 227.77 131 18,531 159.75
2005 107 74,195 734.60 37 18,325 555.30 140 43,177 369.03
2006 163 301,992 1960.99 38 22,389 678.45 243 93,009 467.38

Increase in 3-year average pre- and 1 174 197 38 79 201 11 114 111
post-SOX (in %)

This table presents buyout- and going-private patterns across time for the U.S., the UK, and the rest of the world.
The data is from Thomson Financial Banker One. The sample includes all deals that are announced between 1/1/
1999 and 12/31/2006 and that are classied by Thomson Financial as a going-private (GP), management buyout
(MBO) or leveraged buyout (LBO). I eliminate duplicate entries in the database and aggregate deals by year, type,
and target country (i.e., the U.S., the UK, and the rest of the world). I keep all deals for which information on
the year, type, acquirer name and country, target name and country are non-missing. But I do not require the
ownership percentages sought and/or the transaction value, which for some deals are missing. Panel A reports the
number of GP, MBO, and LBO deals, the total transaction value of all deals (in million U.S.$) and the average
deal size (in million U.S.$) by year and region. The latter two statistics apply only to deals with non-missing
transaction values. Panel B reports the same three statistics as Panel A but for going-private transactions only.
The bottom row in each panel computes the percentage increase averaging three years before and after SOX, i.e.,
from 1999 to 2001 and from 2003 to 2005.
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C. Leuz / Journal of Accounting and Economics 44 (2007) 146165 161

in the latter. Panel B reveals similar patterns when focusing on going-private transactions
only, except that the increase in going-private transactions is not monotonic, i.e., it exhibits
a small spike in 2003 but reaches its maximum in 2006. In either case, there is a clear
upward trend in buyout activity in the US. The main question, however, is whether or to
what extent this trend is attributable to SOX.
To address this question, I examine buyout and going-private trends in the UK and the
rest of the world and use them as a benchmark. Panel A shows that buyout activity has
also risen in other countries around the world. In fact, the percentage increase in buyout
volume averaging 3 years before and after SOX is similar for the U.S. and the rest
of the world. This evidence speaks against a signicant SOX effect. Similarly, the average
deal size has been increasing over time in the U.S. (and other countries), which is also not
what we would expect to see if the recent trends were fueled by SOX. SOX has been
particularly costly to smaller rms and, hence, even if the response to SOX was delayed
(e.g., due to the compliance extensions granted to smaller rms), we would expect to see
that the average deal size falls, rather than increases, as more rms are driven off the public
markets.
Panel B shows that the UK and the rest of the world also exhibit a substantial increase in
going-private activity in recent years, particularly in terms of transaction value, but the
percentage increase is much smaller than in the U.S. Moreover, in the U.S., there is a clear
spike in going-private activity in 2003, together with a decrease in average deal size. Both
of these observations could be indicative of a SOX effect. But again, it is instructive to
compare the U.S. trend with those in other countries. Panel B shows that both the UK and
other countries around the world exhibit a spike in going-private activity in 2003.
Moreover, there is an even more pronounced decline in the average deal size for the rest of
the world (excluding the UK) in 2003. Thereafter, the average deal size steadily increases,
with the U.S. leading the way. Finally, Fig. 1 illustrates graphically how closely world-wide
trends in going-private transactions move together.

Going Private - Number of Deals

300
U.S.
250 U.K.
Rest of the World
200
Deals

150

100

50

0
1999 2000 2001 2002 2003 2004 2005 2006
Years

Fig. 1. Going-private trends around the world (number of deals). The gure presents going-private trends for the
U.S., the UK, and the rest of the world. The data are from Thomson Financial Banker One. The sample includes
all deals that are announced between 1/1/1999 and 12/31/2006 and that are classied by Thomson Financial as a
going-private transaction. The gure reports the number of deals in the U.S., the UK and the rest of the world.
 ARTICLE IN PRESS
162 C. Leuz / Journal of Accounting and Economics 44 (2007) 146165

Based on this (admittedly simple) comparative evidence, it seems unlikely that the going-
private patterns in the U.S. reect a pronounced SOX effect.19 In my view, the emergence
of private-equity rms and the widespread availability of debt nancing for buyout
transactions are likely to be the key drivers behind the recent trends around the world. For
instance, Standard & Poors Leveraged Buyout Reviews in Q2 2006 reports that the
leverage multiple of buyout deals has been steadily increasing since 2001.
My second comment on EHW pertains to the interpretation of going-private
announcement returns. EHWs framework suggests that going-private announcement
returns can be interpreted as an estimate of the net costs of SOX (i.e., the benets from
avoiding compliance with SOX) minus any net benet to being public. As this framework
focuses on efciency arguments and abstracts from agency considerations, the net benet
of being public prior to SOX is by revealed preference (weakly) positive. Put differently,
the observed announcement returns provide a lower bound on the net costs of SOX to
rms that choose to go private.
Based on this interpretation, the going-private announcement returns (EHW, Table 3)
imply that the net costs of SOX exceed 23% of the market capitalization of going-private
rms. In my view, this effect is simply too large to be solely attributable to SOX, especially
considering that investors presumably expect rms to go private with some positive
probability. Any anticipation implies that the unconditional market response to going
private and hence the net SOX costs are much higher. And they would have to be even
larger if the net benet from being public is strictly positive.
Thus, an alternative interpretation, which EHW acknowledge, is that the net value of
being public is negative, possibly due to some unresolved agency problems between the
controlling insiders and the minority shareholders. In this case, the positive announcement
return not only reects any compliance costs that are avoided but also any value that is
unlocked in going private. Thus, this alternative interpretation suggests that going
private confers substantial benets to minority shareholders, e.g., by partially reversing
valuation discounts due to unresolved agency problems.20 From this perspective, it might
even be a benet if SOX induced some rms to go private.
In fact, this interpretation of the evidence is consistent with a small but growing body of
research suggesting that SOX and its provisions have increased the scrutiny that public
rms face, as intended by policy makers, and that this additional scrutiny has had several
positive effects. For instance, Cohen et al. (2006) nd a decline in earnings management
and an increase in the informativeness of rms earnings announcements. Ashbaugh et al.
(2006) present evidence pointing to cost of capital benets from resolving internal control
deciencies. This nding may raise the question of why rms did not resolve these
deciencies earlier, given the documented benets. However, as Hochberg et al. (2007)
emphasize, corporate insiders may be reluctant to give up their private control benets (see
also Greenstone et al., 2006). Thus, both the evidence in Hochberg et al. (2007) that rms
that lobbied against a strict implementation of SOX and the ndings of Ashbaugh et al.
(2006) can be viewed as supporting the idea that SOX and its provisions mitigate
19
Interestingly, many going-private rms come back to the public equity markets after some time. Aramark
Corporation is a case in point as it has gone private twice in recent years. If SOX compliance costs are a reason for
going private, we expect fewer rms to be taken public in future years.
20
Similarly, and consistent with this interpretation, Leuz et al. (2007) show that rms that le a Schedule 13E-3,
which is intended to protect minority shareholders, exhibit signicantly less negative returns to going-dark
announcements.
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C. Leuz / Journal of Accounting and Economics 44 (2007) 146165 163

unresolved agency problems between corporate insiders and outside investors. Similarly,
Leuz et al. (2007) present evidence consistent with the notion that rms go dark partly in
response to the additional scrutiny of SOX and that outside investor protection is taken
more seriously in the post-SOX environment. Finally, Berger et al. (2006) show that stock
market reactions to SOX are more positive for foreign rms from countries with weaker
enforcement of investor rights, suggesting that SOX improves the protection of outside
investors in those rms.
In my view, the announcement return results in EHW are consistent with these studies
and contribute another important piece of evidence to this growing body of literature.

4. Conclusion

This paper discusses evidence on the costs of the SarbanesOxley Act (SOX) from stock
returns and rms going-private decisions. Zhang analyzes stock returns around key
legislative events and concludes that SOX and its provisions have imposed signicant net
costs on rms. EHW examine going-private decisions before and after SOX and point to
potentially unintended consequences of the Act.
Both studies deserve signicant praise for taking on an important and timely issue. Their
analyses are carefully conducted and present interesting empirical evidence. While the
evidence is not conclusive in all respects, the studies cover important ground and clearly
contribute to the literature. My discussion of these studies focuses on the interpretation of
the evidence and, in particular, the issues of whether there is evidence that SOX imposes
net costs on rms and whether their ndings can in fact be attributed to SOX, rather than
general market trends and concurrent events. For instance, NYSE and NASDAQ changed
their listing requirements in response to the corporate scandals around the same time SOX
was passed. Besides, some changes to U.S. governance practices would have taken place
irrespective of SOX, simply due to market pressures after the scandals, which again makes
estimating the marginal effect of the SOX provisions difcult.
The main problem for Zhangs study is that she lacks a good control group of unaffected
rms and that the event windows are fairly long and clustered in time, all of which makes
it difcult to attribute the negative event returns to SOX. In fact, other concurrent news
(e.g., about the impending war in Iraq) and general market trends around the passage of
SOX suggest that Zhangs results likely overstate the negative effect of SOX on U.S. rms,
despite the fact that it is not implausible that SOX imposes net costs on at least some rms.
EHW also face a benchmark problem with respect to trends in rms going-private
decisions. It is much less severe but still important. In fact, while going-private activity
has substantially increased in recent years, there is little evidence that SOX is responsible
for this trend. EHW show based on going-private announcement returns that SOX is
more costly for certain groups of rms, i.e., smaller rms with greater inside ownership.
However, the large positive announcement returns can also be interpreted as suggesting
that going private is able to unlock rm value for minority shareholders. Thus, even if a
going private trend in response to stricter regulation existed, it is not clear that such a trend
should be viewed negatively.
This discussion highlights that we need to exercise caution in interpreting evidence on
the costs of SOX, be it from event returns or going-private decisions. More generally, my
discussion raises questions about popular claims that SOX has been excessively costly to
rms. But I hasten to add that it would not be surprising if one-size-ts-all regulation
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imposed signicant net costs on rms. Moreover, it is possible that SOX set off incentives
to overspend on internal controls because managers and directors bear only a small
fraction of the compliance costs but share disproportionately in a liability from control
deciencies (Coates, 2007). Presently, however, we do not have much SOX-related
evidence to support the conclusion that SOX has been excessively costly. In fact, there is
evidence that SOX has increased the scrutiny public rms face, as intended by Congress,
and that this effect has produced certain benets. But the net effects on rms or the U.S.
economy remain unclear.
In the end, we need more research on these important issues. But rather than studying
the overall costs and benets of SOX, which is fraught with many empirical difculties,
researchers could focus on the implementation of SOX by the SEC and the PCAOB as well
as changes in SOX implementation over time. These events likely offer tighter settings and
hence could result in more progress. Along those lines, it might also be interesting to
examine empirically how the SECs enforcement behavior has changed in recent years and
what (incremental) role the newly created PCAOB assumes when it comes to enforcing
securities laws.

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