The SOX Effect

I have run onto excerpts of this paper a couple of times, including this post at Professor Bainbridge. William J. Carney of Emory University has published a paper on SSRN titled "The Costs of Being Public After Sarbanes-Oxley: The Irony of 'Going Private' ". We, as private investors, need to be very concerned about this trend, especially if we focus our investing in the small and micro cap area. In my experience, company's intending to go private tend have basically lost their incentive to maximize shareholder value, and the premiums paid in these transactions tend to be below average. For the companies that attempt these transactions, it is becoming an open invitation to shareholder litigation. This type of litigation tends to be a bigger win for the law firms involved than for the actual investors.

The paper also covers the issue of companies delisting to avoid the costs of complying with the Act. From a policy point of view, I cannot see where driving a number of smaller companies outside the sphere of regulation is a road we want to go down. Investing has always been risky, but risk reward ratios are going out of balance due to the cost of regulation.