Does SOX Hide Poor Management?
A recent study by Professor Christian Leuz at Wharton explores the causes and consequences of voluntary SEC deregistrations. Professor Leuz cites that many organizations claim that the costs of compliance with the the Sarbanes-Oxley Act influence their decisions to "go dark." The researchers (which also included professors from the University of Maryland) note that small firms estimated the cost of complying with SOX to be as high as $500,000. Deregistration can directly influence the bottom line for these organizations by eliminating the compliance costs. The number of deregistering companies jumped from 43 in 2001 and 67 in 2002 to 198 in 2003. Professor Leuz notes however, that despite the notion that deregistration should save money, following such an announcement, shares of such companies plummet 10% on average. He cites two possible reasons. First, that some of the companies who deregistered were exhibiting weak performance and realized it would be better to go dark. The second is that some of the controlling insiders might want to avoid outside monitoring and additional scrutiny either because they are not managed effectively or because their compensation is excessive. The study, available here (registration required), makes one think for a moment about all of the hype associated with compliance with SOX and deregistration. Is it really because it's too expensive or is it because of poor management?