June 15, 2007

A paper by Kenneth Lehn and colleagues of the University of Pittsburgh:

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 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. We also find that the equity of U.S. companies has become significantly less risky vis-à-vis U.K. companies since SOX. 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.

The authors will present their paper at AEI on Monday; Charles W. Calomiris (AEI/Columbia), Allen Ferrell (Harvard Law), and Kate Litvak (Texas Law) will comment.