The Sarbanes-Oxley Act and Firms' Going-Private Decisions

We investigate firms' going-private decisions in response to the passage of the Sarbanes-Oxley Act of 2002 (SOX). The Act has the potential to bring both benefits, in terms of more transparent disclosure and improvements in corporate governance, and costs, in terms of complying with the new regulation. We argue that firms go private in response to SOX only if the SOX-imposed costs to the firm exceed the SOX-induced benefits to shareholders, and this difference swamps the net benefit of being a public firm prior to the passage of SOX. By examining a sample of all going-private firms from 1998 to 2004, we find: (1) the quarterly frequency of going private has modestly increased after the passage of SOX; (2) the abnormal returns associated with the passage of SOX were positively related to firm size and share turnover; (3) smaller firms and firms with greater inside ownership have experienced higher going-private announcement returns in the post-SOX period compared to the pre-SOX period. Our empirical evidence is broadly consistent with the notion that SOX has affected firms' going-private decisions.

[1]  April Klein.  Likely Effects of Stock Exchange Governance Proposals and Sarbanes‐Oxley on Corporate Boards and Financial Reporting , 2003 .

[2]  J. Heckman.  Sample selection bias as a specification error , 1979 .

[3]  M. C. Jensen,et al.  Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers , 1999 .

[4]  Thomas Z. Lys,et al.  The Sarbanes Oxley Act of 2002: Implications for Compensation Structure and Risk-Taking Incentives of CEOs , 2004 .

[5]  Andrei Shleifer,et al.  Investor Protection and Equity Markets , 2000 .

[6]  A. Shleifer,et al.  Management Ownership and Market Valuation: An Empirical Analysis , 1988 .

[7]  Brian J. Bushee,et al.  Economic Consequences of Sec Disclosure Regulation: Evidence from the OTC Bulletin Board , 2004 .

[8]  Karl V. Lins,et al.  Adrs, Analysts, and Accuracy: Does Cross Listing in the U.S. Improve a Firm's Information Environment and Increase Market Value? , 2002 .

[9]  Ann C. Logue.  The State of U.S. Corporate Governance: What's Right and What's Wrong? , 2004 .

[10]  Michael Greenstone,et al.  Mandated Disclosure, Stock Returns, and the 1964 Securities Acts Amendments , 2005 .

[11]  Alan D. Jagolinzer,et al.  Economic Consequences of SEC Disclosure Regulation , 2003 .

[12]  Krishna G. Palepu,et al.  Predicting takeover targets: A methodological and empirical analysis , 1986 .

[13]  Morton Pincus,et al.  Market Reaction to Events Surrounding the Sarbanes-Oxley Act of 2002 and Earnings Management , 2006 .

[14]  Roger G. Ibbotson,et al.  INITIAL PUBLIC OFFERINGS , 1988 .

[15]  Jeremy C. Stein,et al.  Efficient Capital Markets, Inefficient Firms: A Model of Myopic Corporate Behavior , 1989 .

[16]  Kin Lo.  Economic consequences of regulated changes in disclosure : the case of executive compensation , 2002 .

[17]  A. Mackinlay,et al.  Event Studies in Economics and Finance , 1997 .

[18]  S. Kaplan,et al.  The State of U.S. Corporate Governance: What's Right and What's Wrong? , 2003 .

[19]  Annette B. Poulsen,et al.  Free Cash Flow and Stockholder Gains in Going Private Transactions , 1989 .

[20]  Marco Pagano,et al.  The Geography of Equity Listing; Why Do Companies List Abroad? , 2002 .

[21]  H. DeAngelo,et al.  Going Private: Minority Freezeouts and Stockholder Wealth , 1984, The Journal of Law and Economics.

[22]  Disclosure Requirements and Stock Exchange Listing Choice in an International Context , 1999 .

[23]  Alexander J. Triantis,et al.  Why Do Firms Go Dark? Causes and Economic Consequences of Voluntary SEC Deregistrations , 2008 .

[24]  K. Schipper,et al.  Wealth effects of going private for senior securities , 1989 .

[25]  Utpal Bhattacharya,et al.  Is CEO Certification of Earnings Numbers Value-Relevant? , 2007 .

[26]  Rex Thompson,et al.  Stock price reactions as surrogates for the net cash flow effects of corporate policy decisions , 1988 .

[27]  John R. M. Hand.  Resolving Lifo Uncertainty - A Theoretical And Empirical Reexamination Of 1974-75 Lifo Adoptions And Nonadoptions , 1993 .

[28]  Mary E. Barth,et al.  Share repurchases and intangible assets , 1999 .

[29]  Zabihollah Rezaee,et al.  The Sarbanes-Oxley Act of 2002 and Security Market Behavior: Early Evidence , 2005 .

[30]  David W. Hosmer,et al.  Applied Logistic Regression , 1991 .

[31]  Krishna G. Palepu,et al.  Information Asymmetry, Corporate Disclosure and the Capital Markets: A Review of the Empirical Disclosure Literature , 2000 .