Saturday, May 25, 2013

Sarbanes-Oxley and the capacity of the U.S. to fund new businesses

Another completely obvious academic study (apparently) shows that Sarbanes-Oxley has driven initial public offerings to the United Kingdom:

In an article forthcoming in the Review of Finance, we find that since the implementation of Sarbanes-Oxley in the US, foreign companies are significantly more likely to list in the UK relative to the US than before Sox. At the same time, the quality of companies listing in the US has improved, as evidenced by the fact that foreign companies that announce a cross-listing in the US experience an additional positive announcement return of about 3.6 percentage points. Hence regulation matters by deterring or attracting certain types of companies.
Of course, nobody believes that Sarbanes-Oxley actually raises the "quality" of any company. Rather, it effectively prevents early-stage companies from raising money in the public markets. One might argue whether that is a bug or a feature -- I think fairly obviously the former, insofar as it denies early investors a public exit and therefore substantially raises the return hurdles required to commit money to new businesses in the first place.

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