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Working Paper No. 8
Was the Sarbanes-Oxley Act of 2002 really this costly?
A Discussion of Evidence from Event Returns and Going-Private Decisions
Christian Leuz
The Graduate School of Business
University of Chicago
Initiative on Global Markets
The University of Chicago, Graduate School of Business
“Providing thought leadership on financial markets, international business and public policy”
Was the Sarbanes-Oxley Act of 2002 really this costly?
A Discussion of Evidence from Event Returns and Going-Private Decisions*
Christian Leuz
The Graduate School of Business
University of Chicago
May 2007
(Forthcoming Journal of Accounting and Economics, 2007)
Abstract
This paper discusses evidence on the costs (and benefits) of the Sarbanes-Oxley Act (SOX) from
stock returns and firms’ going-private decisions. Zhang (2006) analyzes stock returns around key
legislative events and concludes that SOX and its provisions have imposed significant net costs
on firms. Engel et al. (2006) examine going-private decisions before and after SOX and point to
unintended consequences of SOX. Both studies are carefully conducted and deserve praise for
tackling a timely and important issue. However, as my discussion and its evidence highlight,
several of the key findings may not be attributable to SOX. Instead, they may reflect broader
market trends. Thus, we need to exercise caution in interpreting the existing evidence. While it is
not implausible that one-size-fits-all regulation imposes significant costs on firms, we presently
do not have much SOX-related evidence supporting this conclusion. In fact, there is a growing
body of evidence (which I briefly review) that SOX has increased the scrutiny on firms and has
produced certain benefits. But its net effects on firms or the U.S. economy remain unclear.
JEL classification:
Key Words:
*
G14, G15, G38, G30, K22, M41
Securities regulation, Event study, Disclosure, Corporate governance, Cost-benefit
analysis, Stock returns, Going private, Going dark
I thank the editors (S.P. Kothari and Jerry Zimmerman), Luzi Hail, Steve Kaplan, Alex Triantis, and Tracy Wang
for helpful comments on an earlier version. I also thank Jeff Ng for valuable research assistance. Christian Leuz
gratefully acknowledges research funding provided by the Initiative on Global Markets at the University of
Chicago, Graduate School of Business.
1.
Introduction
Ever since its passage, the merits of the Sarbanes-Oxley Act of 2002 (henceforth SOX) have
been vigorously debated. Critics argue that SOX was hastily put together in response to several
high-profile corporate scandals and that it imposes substantial costs on firms without
commensurate benefits (e.g., Ribstein, 2002; Solomon and Bryan-Low, 2004; FEI, 2005;
Romano, 2005). More recently, there is concern that the U.S. capital market is losing its leading
position and competitiveness and that the regulatory burden of SOX is a driving force behind this
development.1 Contributing to this debate, two recent studies by Zhang (2006) and Engel, Hayes
and Wang (2006) examine the extent to which SOX has imposed significant (net) costs on firms.
Both studies deserve significant praise for tackling this timely and important issue.
In this paper, I discuss these two prominent studies as well as related evidence on the costs
and benefits of SOX. As the studies are carefully conducted, my discussion focuses on the
interpretation of the evidence and, in particular, the issue of whether their findings can in fact be
attributed to SOX, rather than general market trends and concurrent events (such as revised listing
rules or other news). Towards this end, I also present new evidence suggesting that we need to
exercise caution in interpreting the results of both (and related) studies.
The first paper by Zhang (2006) examines stock price reactions to key legislative events
related to the passage and implementation of SOX. The idea is that stock returns over key event
days should reflect firms’ expected private costs and benefits of SOX.
She finds that the
cumulative raw return of the U.S. market around key legislative events is significantly negative
and large (about -15%). Benchmarking this return against concurrent foreign market returns, she
1
See for example the report by the Committee on Capital Market Regulation (2006), whose work was endorsed
by U.S. Treasury Secretary Henry Paulson, and the report by McKinsey and Company (2007) commissioned by
New York’s Mayor Michael Bloomberg and Senator Charles Schumer.
1
finds that the U.S. market return is more negative. However, the raw return differential is much
smaller, i.e., between -2% and -7.5% depending on the foreign market, and not always significant.
She also estimates cumulative abnormal returns using market indices constructed from foreign
firms without U.S. listings and finds that the abnormal U.S. market return around key SOX
events is -4.4% using stocks in Canada, Europe and Asia and almost -8% using stocks in Canada.
Overall, Zhang views her results as suggesting that SOX imposes significant net costs on firms.
As a next step, Zhang analyzes cross-sectional differences in the stock market reactions
across firms as an attempt to shed light on the private costs of particular SOX provisions and
hence the sources of the overall costs. She documents that firms’ cumulative abnormal returns
around the key SOX events decrease with the extent to which they purchase non-audit services
prior to the Act, have charters with weaker shareholder rights, more extensive foreign operations
and larger abnormal accruals. The associations with incentive pay and firms’ lines of business are
not or only weakly significant. Zhang interprets these cross-sectional results as consistent with
her earlier findings and the notion that the SOX provisions on non-audit services, corporate
responsibilities and internal controls impose net private costs on firms. Lastly, she presents
evidence that small firms for which the compliance with SOX was significantly delayed
experienced significantly larger abnormal returns. Again, this finding is consistent with the
notion that SOX imposes significant costs.
If SOX is really as costly to firms as Zhang suggests, we would expect firms to engage in
avoidance strategies. The paper by Engel, Hayes and Wang (2006) (henceforth EHW) addresses
precisely this issue by analyzing firms’ going-private decisions around SOX as well as the market
responses to these decisions. The basic idea of their study is that firms can avoid the costs
associated with SOX by going private and that they will do so whenever the costs imposed by
2
SOX outweigh the benefits generated by SOX plus any net benefit from being public prior to
SOX.2 Based on this revealed-preference approach, EHW predict that SOX compliance costs
weigh more heavily for smaller firms due to their fixed component and that SOX provisions
aimed at improving governance and making insider holdings less liquid are likely to have smaller
benefits when firms are already well governed and insider holdings are already relatively illiquid
(see also Holmstrom and Kaplan, 2003). They also expect the net benefits of being public to be
smaller for firms that are small, have thin trading volume and low financing needs.
EHW pose three research questions: Is SOX associated with an increase in going-private
transactions? Did firm characteristics associated with going-private decisions change around
SOX? Did the determinants of going private announcement returns change around SOX? EHW
provide evidence suggesting a higher incidence of going-private transactions after SOX. They
show that abnormal returns on key events increasing the likelihood of SOX passage are positively
associated with firm size and share turnover, suggesting that SOX was more costly for smaller
and less liquid firms. Lastly, they document that smaller firms with greater inside ownership
experience higher announcement returns to going private after SOX, consistent with the notion
that going private is likely to be most beneficial to firms with these characteristics. Overall, the
evidence is consistent with the predicted tradeoff between being public and going private and the
authors’ hypotheses about the effects of SOX on firms’ going-private decisions.
In summary, both papers provide interesting empirical evidence on an important topic. They
contribute to the literature by highlighting potential SOX costs. Zhang analyzes the net costs to
all U.S. firms, whereas EHW focus on firms that go private. While the latter study seems less
2
Note that the latter net benefit includes the costs of the going-private transaction itself.
3
ambitious in scope, its evidence is quite important. It highlights that firms typically can and will
respond to costly regulation, which in turn leads to unintended consequences. As such, EHW
remind regulators to consider firms’ potential avoidance strategies in designing and evaluating
securities regulation.3
The subsequent discussion focuses on the interpretations of the findings and the conclusions
we can draw from them. Let me begin by stating that it is not implausible that massive, one-sizefits-all regulation imposes significant costs on firms.4 It is generally difficult for regulation to
improve upon private contracting.5 Thus, from a conceptual point of view, I am sympathetic to
both studies. However, a key question is whether the two papers present convincing evidence
that SOX does in fact impose net costs on all or at least a subset of U.S. firms.
The main problem in assessing the net effects of SOX using stock returns is that the act was
imposed on (essentially) all U.S. publicly-traded firms and hence it is difficult to find a control
group of firms that is (a) not affected and (b) comparable to U.S. firms.6 The lack of a proper
control group is the main (but not the only) reason why it is not clear that Zhang can really
attribute the large negative returns around key legislative events to SOX. The use of concurrent
foreign market returns as a benchmark mitigates but in my view does not resolve the issue
(despite the fact that it significantly attenuates her results).
3
4
5
6
Further examples are the studies by Jarrell (1981) and Bushee and Leuz (2005).
Whether SOX is in fact one-size-fits-all regulation is debated among legal scholars. See Butler and Ribstein
(2006) and Coates (2007).
The basic idea goes back to Coase (1960). See Leuz and Wysocki (2007) for a survey of the literature in the
area of disclosure regulation.
There are a number of studies that analyze the effects of SOX on foreign firms (e.g., Berger et al., 2006; Litvak,
2006). As discussed in Section 2, these studies have a smaller benchmark problem, but it is not clear that we can
extrapolate their findings to U.S. firms.
4
To illustrate my point, I conduct a simple analysis of news articles and show that the key
legislative events are days with major economic and political news. If foreign markets were
equally affected by these news events, adjusting for foreign market returns would solve the issue.
However, I argue that this is unlikely and present evidence that the event days are likely to be
contaminated by news that are more relevant to U.S. than foreign firms (e.g., about the impending
war in Iraq or the creation of the Department of Homeland Security). Furthermore, I show that
the Chicago Board of Trade’s volatility index (VIX) increases substantially around the passage of
SOX, consistent with a general decline in investor sentiment. This evidence suggests that we
have to be very careful about attributing negative returns over this time period to SOX, unless we
have reasons to believe that SOX is responsible for the increase in market uncertainty (despite the
fact that it was intended to counteract the loss in investor confidence). My final comment on
Zhang’s study is that it is difficult, if not impossible, to separate the effects of particular SOX
provisions using cross-sectional analyses of the event returns. SOX was debated and passed as a
package of complementary provisions and there are no event dates that could be assigned to
specific provisions alone.
Turning to the interpretation of EHW’s findings, I first discuss the definition of going private
and point out that there are different types of SEC deregistrations. Some firms deregister from
the SEC, but continue to trade publicly in the OTC markets. Other firms discontinue trading and
become a private company. The former group is merely going dark, which is very different from
going private (Leuz et al., 2007). Once EHW exclude going-dark firms, there is no significant
spike in going-private activity right after the passage of SOX. Leuz et al. (2007) document that
the observed increase in deregistrations after SOX stems from going-dark firms.
In this
discussion, I also show that there is a marked increase in going-private activity since 2005,
5
particularly with respect to deal volume. However, this spike is likely to be attributable to the
recent private-equity boom and the availability of debt for going-private transactions, rather than
SOX. Consistent with this conjecture, I show that the rest of the world exhibits similar timeseries patterns in going-private and buyout activity as the U.S.
My second comment pertains to the interpretation of positive returns to going-private
announcements. EHW’s primary interpretation is that positive returns are indicative of net SOX
costs that firms avoided by going private. This interpretation follows from their conceptual
framework and the argument that by revealed preference the net benefits from being public are
positive or at least non-negative. However, this interpretation implies that the net costs of SOX
are very large and on average 23% of firms’ market capitalization. An alternative explanation is
that going private has positive benefits because the net value of being public is negative for these
firms, possibly due to some unresolved agency problems between the controlling insiders and the
minority shareholders. In this case, not all the announcement returns are attributable to SOX
costs. To the contrary, this interpretation suggests that SOX induces some firms to go private and
in the process unlocks value for the minority shareholders of these firms.
Along these lines and to round out the discussion, I review studies documenting that SOX
has increased the amount of scrutiny leveled on firms, as the policy makers intended, and has
delivered some benefits. But again, we have to be careful in interpreting these findings. They do
not provide evidence on net benefits to firms and do not imply that SOX was beneficial overall.
We need more research on these important issues. But rather than focusing on the overall costs
and benefits of SOX, which is fraught with many empirical difficulties, we are likely to make
more headway by studying the implementation of SOX and its subsequent amendments.
The remainder of the paper is organized as follows. Section 2 discusses the main findings in
Zhang (2006) and the question of whether the negative event returns are attributable to SOX. In
6
Section 3, I discuss the main findings in Engel et al. (2006) and the question of whether firms go
private in response to SOX. Section 4 concludes.
2.
Are the negative event returns presented in Zhang (2006) attributable to SOX?
Zhang’s main result is that the cumulative raw and abnormal returns around key SOX events
are significantly negative, which she interprets as evidence that SOX imposes significant net costs
on firms. The negative cumulative return to the SOX events is driven by three significantly
negative event windows: February 2, July 8-12, and July 18-23. The value-weighted raw returns
for U.S. stocks on those days are -3.0%, -6.3% and -11.9%, respectively. In addition, there is a
window with a significantly positive (raw) return: July 24-26 (6.1%). Zhang argues that on these
days the agreement on the final rule eliminated concerns about even tougher rules and hence that
the positive returns are consistent with SOX being costly to firms.
Zhang’s event dates are meticulously researched and she is also very careful in assessing the
significance of the event returns. However, her main conclusion and the sign of the cumulative
return are fairly sensitive to the choice of event dates. Two competing studies by Rezaee and Jain
(2006) and Li et al. (2007) choose slightly different event days and find that the cumulative event
return to SOX is significantly positive. Consequently, they suggest that SOX was beneficial to
firms.
The key problem for all three event studies is that SOX applies to all exchange-listed and
SEC-registered U.S. firms. Thus, a natural control group of comparable, but unaffected U.S.
firms does not exist.7 This shortcoming makes it difficult to remove market-wide effects that are
unrelated to SOX. In addition, SOX events are clustered in time and extend over several days. In
7
One alternative would be to use U.S. firms in the OTC markets (e.g., Pink Sheets) that are not subject to SEC
disclosure regulation as a benchmark. However, these firms tend to be fairly small and the OTC markets are
much less liquid than the regular U.S. exchanges. See, e.g., Bushee and Leuz (2005).
7
fact, three of the four key legislative events are in July 2002 and Zhang’s event windows cover all
but three trading days in the second half of July. This setting is in stark contrast to the typical
event study where not all firms are affected and event days are dispersed in time, both of which
facilitates “washing out” other effects and isolating the event return. To make matters worse,
NYSE and NASDAQ changed their listing requirements in response to the corporate scandals
around the same time SOX was passed. As a result of all these issues, I do not think that we can
draw any inferences with respect to SOX from the raw market return. Besides, the magnitude of
the cumulative raw return is very large and it seems implausible that SOX destroyed 15% of the
U.S. market capitalization.8
Zhang recognizes that market returns over the event days capture other news. To address this
issue, she searches for confounding news events using the following terms: federal legislation,
federal regulation, scandals, and securities fraud. She finds several confounding events and uses
intra-day returns to assess the impact of these events. Zhang also analyzes quarterly earnings
releases to check whether negative earnings news cluster in July 2002. She finds that earnings
news in July were generally more positive than the rest of the year, except for three days where
the proportion of negative and positive news is roughly even (all of which fall into the key event
windows). Based on these analyses, she dismisses that other concurrent rulemaking activities,
news about the accounting scandals or earnings news drive her results.
Even if this conclusion were correct, note that the problem of confounding news events is not
limited to other rulemaking activities and earnings news. Event returns could also be affected by
8
As a potential explanation for this magnitude, Zhang discusses that the market reaction may also reflect
expectations about future anti-business legislation. While it is possible that, at the time, the equilibrium between
anti-business and pro-business lobby groups shifted, I find it implausible that this shift had a lasting effect and
hence explains the large negative reaction. Costly anti-business regulation is often followed by pro-business
regulation (or amendments). Recent developments easing the burden of SOX support this conjecture.
8
broad stock market trends and major macroeconomic or political news. To get a sense for this
problem, I conduct a simple analysis of headline news over the four significant event windows
reported in Zhang’s Table 2. I restrict the analysis to the daily news summary provided in the
New York Times (NYT) for two reasons. First, using this news summary makes picking major
headlines less subjective. Second, the NYT is more geared towards political news and “bigpicture” economic news than business newspapers and hence well suited for my purposes.
However, an (admittedly more subjective) analysis of major news events and headlines in the
Wall Street Journal over key legislative events does not change my conclusions below.
Table 1 reports several NYT headlines as well as quotes from the news summaries as
examples. It is obvious that the key legislative event windows are also days with major political
and economic news. The headlines refer to extensive military spending, the impending war in
Iraq, threat from terrorism, the creation of the Department of Homeland Security, negative
macroeconomic news, fears about a recession, and a massive decline in the stock markets. The
corporate scandals in the U.S. and the legislative response to these scandals are also mentioned.
The latter is generally cast in a positive light. Interestingly, fears of a legislative overreaction to
the scandals or concerns about costly regulation are not once discussed in these news summaries.
Considering these confounding news events, the general market trend at the time, and the
length and clustering of Zhang’s event windows, it seems obvious that we cannot simply attribute
the raw market return for U.S. firms to SOX. In response to these concerns and the conference
discussion, Zhang uses foreign market returns in Canada, Europe and Asia to adjust U.S. market
9
returns.9
Simply subtracting returns in these foreign markets from the U.S. market return
substantially reduces the cumulative abnormal return to SOX and renders it often insignificant.
But the cumulative abnormal return remains negative in all cases and in many cases is still fairly
large in magnitude (-2% to -7.5%). To account for the fact that foreign stocks likely react
differently to global news than U.S. stocks, Zhang estimates abnormal U.S. market returns from a
market model with foreign returns and finds that the cumulative abnormal return to SOX is still
negative and between -4.3% and -8.0%.
These adjustments are clearly an improvement, but they are unlikely to address concerns
about confounding news events in the U.S. markets. Benchmarking with foreign returns can take
out worldwide news and global market trends. However, as Table 1 shows, there are many news
events that are fairly specific to the U.S. but unrelated to SOX (e.g., news about U.S. military
spending, the U.S. strategy with respect to Iraq, the Department of Homeland Security). These
news events remain a substantial concern.
In addition, I am concerned that the cumulative abnormal return to SOX simply reflects the
massive and general downward trend in U.S. equity markets in July 2002, as most of the key
event windows fall into this month. Again, benchmarking with foreign returns helps with respect
to this concern, but it is unlikely to solve the problem. Several of the news articles in Table 1
indicate that the U.S. market was leading the downward slide in equity markets around the world.
To illustrate my concern about the effects of a general market trend in July 2002, I examine
the volatility index for the S&P 500 (VIX). This index is a measure of market expectations of
near-term volatility conveyed by S&P 500 stock index option prices and widely used barometer
9
The conference version adjusted U.S. market returns using a macroeconomic model following Flannery and
Protopapadakis (2002). However, the explanatory power of the model was extremely small, so that the
abnormal market return essentially reflected the raw U.S. market return.
10
of investor sentiment (Baker and Wurgler, 2006). Table 2 reports the average VIX levels for
various intervals.
Panel A reports the yearly averages from 2000 to 2002, mainly for
benchmarking purposes. It shows that the volatility index is generally below 30%. Panel B
reports weekly averages for the VIX and shows that key SOX events fall into a time period that
exhibits a volatility spike that is comparable to the volatility spike following the events of
September 11, 2001. It is unlikely that the passage of SOX is responsible for this increase in
volatility, even if SOX entails major net costs to firms. If anything, the news summaries in Table
1 refer to articles that view legislative progress on SOX as reducing uncertainty and restoring
confidence in corporate reporting. Confirming this impression, Jain et al. (2006) report that bidask spreads widened before SOX and then fell dramatically over the nine-month period following
the passage of SOX (see also Coates, 2007).
Similarly, Panel C shows that the increase in market volatility was sustained through
September 2002 and then starts declining.
Thus, the volatility spike is not isolated to the
legislative events leading to the passage of SOX.10 To me this evidence suggests that a large
portion of the event returns is driven by broad changes in the economic outlook and general
macroeconomic uncertainty at the time. Thus, in sum, it is not clear what we can conclude from
the negative returns around key SOX events, with or without the market adjustment using foreign
stock returns.
My second major comment applies to the cross-sectional analysis of SOX event returns.
Zhang views this analysis as shedding light on the costs of individual provisions. She finds that
firms’ cumulative abnormal returns around the key SOX events decrease with the extent to which
10
In footnote 13, Zhang reports that including implied volatility indices for the FTSE100, S&P500, and TSE60 in
her abnormal foreign returns model does not alter her inferences. While this finding is reassuring, my concern is
not limited to daily innovations in these indices. I use the VIX simply to show that the passage of SOX falls
into a very volatile and uncertain market period.
11
they purchase non-audit services prior to the Act, have charters with weaker shareholder rights,
more extensive foreign operations and larger abnormal accruals.11 Based on these findings, she
concludes that the cross-sectional analysis “rejects the hypothesis that three major provisions
entail no net costs to firms, providing additional support for the hypothesis that the market
initially expected SOX to be costly.”
While I agree that, in principle, assessing the impact of specific provisions is important, it is
difficult to disentangle the effects of individual provisions on the event returns. SOX was passed
as a package of provisions and there appear to be few event days where only particular provisions
were debated, changed or added. Thus, it is not clear to me that we can interpret the crosssectional results as evidence on the costs (or benefits) of particular provisions. In my view, these
tests are more likely to provide sensitivity checks with respect to Zhang’s general conclusion that
the negative cumulative return for all firms indicates that SOX imposes net costs on U.S. firms.
That is, if we can find firms that a priori are more (or less) likely to be negatively affected by
SOX, showing that these firms indeed experience more (less) negative abnormal returns should
help with the identification of SOX effects and increase our confidence in the results.12 However,
this identification strategy relies crucially on our ability to identify firms that are (without much
doubt) more negatively affected by SOX and, at the same time, not also more negatively affected
by the other concurrent news events over the passage of SOX. However, finding such firms is not
trivial. Even studies by Chhaochharia and Grinstein (2006) and Hochberg et al. (2007), which
use innovative SOX-related characteristics (e.g., whether firms are in compliance with SOX
11
12
However, the event-by-event analyses show that the signs of the associations with various firm characteristics
are often not robust, particularly not for the earlier event dates. See Zhang (2006), Table 5, Panel B.
This is in essence the identification approach in Chhaochharia and Grinstein (2006) and Hochberg et al. (2007).
12
provisions or lobbied against SOX), need further firm characteristics such as firm size or the
quality of governance to interpret their findings.
One of the problems is that the optimal levels of internal controls, corporate governance or
non-audit services differ across firms, which in turn makes the effect of SOX hard to predict. It is
plausible that excessive provisions are more costly for firms that already have good internal
controls and governance, as Zhang argues (see also Holmstrom and Kaplan, 2003). But this is not
necessarily true. It is also conceivable that firms, for which strong formal internal controls are
optimal, find it easier to deal with the additional SOX requirements than firms, for which fewer
and less formal controls are optimal. In this case, the cross-sectional prediction reverses. In order
to address this problem, we would have to identify the SOX effects relative to firms’ optimal
governance and internal control structures, rather than along the same continuum for all firms.13
This is obviously difficult, if not impossible, to do.
Furthermore, even if we were able to create such a classification and found that it is
positively associated with firms’ cumulative abnormal returns to key SOX events, we would have
to be careful about what we conclude from this finding. It would indicate that SOX was more
costly for firms with this particular firm characteristic, but it would still be possible that SOX as a
whole has net benefits. The reverse would hold for negative relations. Suggesting that there are
both winners and losers, Chhaochharia and Grinstein (2007) provide evidence that large firms that
are less compliant earn positive abnormal returns but small firms that are less compliant earn
negative abnormal returns around key SOX events. Thus, in my view, there are clearly limits in
how far we can take the cross-sectional results.
13
However, outright prohibition of certain practices, such as executive loans or non-audit services, may offer
clearer predictions in this regard, as it seems unlikely that the optimal level for these practices is zero.
13
Let me conclude this section by stating that I would not be surprised if SOX imposed
significant net costs on at least some firms. Prior work on disclosure regulation shows that it is
difficult for regulators to improve upon private contracting.14 We also have evidence that onesize-fits-all disclosure regulation can be costly for many firms (e.g., Jarrell, 1981; Bushee and
Leuz, 2005). But as Coates (2007) points out, it is not clear that SOX is appropriately described
as one-size-fits-all regulation, given that much of its implementation was delegated to the SEC
and the Public Company Accounting Oversight Board (PCAOB). He argues that the costs of
SOX are subtle and likely to stem from incentives to overspend on internal controls, rather than
the SOX provisions per se. That is, the problem may be that managers and directors bear only a
small fraction of the compliance costs but share disproportionately in a liability from control
deficiencies.
However, there is evidence that SOX is costly to particular groups of firms. The studies by
EHW and Leuz et al. (2007) fall into this category. More closely related to Zhang’s study, Berger
et al. (2006) and Litvak (2006) assess the impact of SOX on foreign firms that are cross-listed on
U.S. exchanges, relative to U.S. firms and foreign firms, respectively. Berger et al. (2006) find
that the value-weighted portfolio of cross-listed foreign firms has a significantly more negative
stock price reaction to SOX than the value-weighted U.S. market, suggesting that SOX has been
costly to foreign firms. Similarly, Litvak (2006) finds that foreign firms that are subject to SOX
react more negatively than either matched cross-listed foreign firms that are not subject to SOX or
non-cross-listed foreign firms. Zhang confirms both of these findings in her sensitivity analyses.
In my view, the findings for foreign firms are easier to interpret than Zhang’s results for two
reasons. First, as Berger et al. (2006) point out, the inclusion of foreign firms in SOX was more
14
See, e.g., the survey by Leuz and Wysocki (2007).
14
of a surprise than an intention and the issue was discovered on the last day of the Senate debate.
This feature implies that they can use a more sharply defined event window that is less
susceptible to other concurrent news events. Second, there are more natural control groups for
foreign firms. We can use matched firms from the same country or even matched firms from the
same country that are also cross-listed on U.S. markets but not subject to SOX (e.g., Litvak,
2006). To the extent that these firms are affected similarly by confounding news events but
differentially by SOX, the event returns should reflect the net costs and benefits of SOX.
Thus, as the results in Berger et al. (2006) and Litvak (2006) are consistent with Zhang’s
findings, they can be viewed as corroborating her conclusion that SOX imposes net costs on
firms. However, it is of course an open question whether or not we can extrapolate the findings
for foreign firms to U.S. firms. For instance, it is conceivable that foreign firms are affected more
negatively if SOX compliance creates contradictions with foreign governance regulation.
Given the problems in properly identifying SOX effects, Hochberg et al. (2007) use lobbying
behavior of corporate insiders as a way to identify firms that are more likely to be affected by
SOX. They demonstrate that firms whose insiders lobbied against a strict SOX implementation
experience significantly positive abnormal returns over the passage of SOX, relative to firms that
did not lobby (and hence are deemed less affected). They interpret this result as suggesting that
SOX improves the disclosure and governance of lobbying firms and that SOX benefits outside
shareholders. This approach is similar in spirit to Zhang’s cross-sectional analyses, which also
tries to identify firms that are more negatively affected by SOX. The advantage of using lobbying
behavior, however, is that it relies on observable behavior that is more directly related to SOX.
15
That is, the set of firms that wrote letters against a strict implementation of SOX is well defined
compared to the approach in Zhang’s study that uses various firm characteristics.15
But of course the set of lobbying firms is likely to be small and probably not representative.
Moreover, we still need firm characteristics to aid our interpretation of the findings. For instance,
the conclusion that SOX has been beneficial to outside shareholders of lobbying firms is more
plausible if there is evidence that these firms are poorly governed or that insiders of these firms
consume more private control benefits at the expense of outsiders. Without such evidence, the
documented return differential could also reflect that lobbying firms are better governed firms and
hence better able to cope with SOX or that better performing firms have more time to lobby. In
the end, as noted above, the interpretation of cross-sectional differences in abnormal SOX returns
hinges critically on having convincing predictions on how SOX has differentially affected firms.
In sum, we can conclude that there is return-based evidence that SOX imposes net costs on
particular groups of firms (e.g., smaller firms), but little evidence on net SOX costs to all U.S.
firms or the economy as a whole.
3.
Do firms go private in response to SOX?
A different approach to assessing the costs (or benefits) of SOX is analyzing firm behavior
and, in particular, firms’ avoidance strategies. EHW essentially take this approach. They begin
with the basic observation that firms can avoid the costs associated with SOX by going private
whenever the incremental costs imposed by SOX outweigh its benefits plus any net benefit from
being public prior to SOX. This framework provides a nice structure for their analysis and a
number of plausible empirical predictions, which I have summarized in the introduction.
15
Of course, firms can lobby in other ways that are less observable to researchers. However, not identifying these
firms is likely to make it harder to find significant differences relative to the control group.
16
The first question with respect to EHW’s study is whether SOX is in fact associated with an
increase in going-private activity.
EHW present evidence to this effect in their Table 1.
However, in interpreting this evidence, it is important to consider the definition of going private.
EHW follow the SEC’s definition and restrict their sample to Rule 13e-3 going-private
transactions, which are transactions initiated by affiliates (i.e., insiders or entities) that take the
number of “shareholders” below 300 and allow the firm to deregister from the SEC.16 This
definition has been commonly used in the literature (e.g., DeAngelo et al., 1984; Lehn and
Poulsen, 1989), but it is problematic for several reasons. First, it includes firms that simply
perform a reverse-stock split as well as firms that deregister from the SEC but continue to trade in
the Pink Sheets. Second, it ignores firms that have already fewer than 300 record holders and
hence do not have to file Schedule 13E-3 but nevertheless decide to go private.
In my view, going private is a change of organizational form. It involves a re-capitalization
or concentration of ownership and it implies that the firm is no longer publicly traded. However,
the SEC’s definition and EHW’s sample construction do not differentiate between firms that
continue to trade and those that do not. Leuz et al. (2007) argue that the former group of firms is
more appropriately viewed as “going dark,” rather than going private, because these firms
primarily terminate their obligation to provide financial statements, but remain publicly traded.
The distinction is not just a semantic issue. It matters both conceptually and empirically.
First, the distinction matters because it highlights that firms can respond to costly regulation in
multiple ways. As EHW also note, going-private strategies are not homogenous. Second, it
matters because the stock market responds very differently to going-private and going-dark
16
Strictly speaking, the rule refers to firms’ holders of record and not the beneficial shareholders. Record holders
are counted at the level of the intermediary. See Leuz et al. (2007) for more discussion of this issue.
17
announcements. The former announcements usually result in large positive reactions, while the
latter announcements lead to significantly negative reactions (Leuz et al., 2007). Similarly, EHW
show that going-private announcement returns are much smaller for transactions involving
reverse-stock splits and small shareholder purchase offers. Given their going-private definition,
these transactions likely comprise many of the going-dark firms (see their Table 9).
Furthermore, Leuz et al. (2007) show that going-dark firms are smaller, more distressed, have
weaker performance and governance than going-private firms. Thus, going dark and going
private are economically very different, which is important with respect to the conclusions that
we draw from finding that SOX has fueled either trend. That is, we would probably be much less
concerned about a SOX effect on relatively small and distressed firms than we would be about an
effect on larger, well-performing and growing firms.
The definition of going-private firms primarily affects EHW’s analysis of going-private
trends but has little impact on the other findings.17 That is, the increase in going-private decisions
per quarter is no longer statistically significant once firms that continue to trade in the Pink Sheets
are removed from their sample (EHW, footnote 15). As Leuz et al. (2007) show, the increase in
SEC deregistrations after SOX is primarily driven by firms that go dark, rather than private.
Going-dark decisions increase immediately after the passage of SOX and their monthly frequency
closely “tracks” events related to the implementation of SOX, such as extensions to the
compliance with Section 404 (Leuz et al., 2007, Table 6). This pattern is suggestive of a SOX
17
EHW’s other results are less affected because not many going-dark firms enter their regression analyses. For
these analyses, EHW impose further data restrictions, which make the sample biased towards larger, exchangetraded firms with coverage in CRSP. Also, note that several tests include controls for “transaction type” or Pink
Sheet trading. EHW explicitly report that, with the exception of their Table 1 results, inferences are robust to
dropping the remaining going-dark firms.
18
effect. In contrast, there is no significant increase in going private in the months immediately
following SOX.
These findings may be surprising in light of all the anecdotal evidence that going-private
activity has significantly increased over the last few years. To reconcile this issue, I examine
buyout and going-private trends over a longer window, i.e., from 1999 to 2006. I collect data
from Thomson Financial Banker One on all M&A deals around the world that are announced
between 1/1/1999 and 12/31/2006 and classified as either a going-private, management buyout
(MBO) or leveraged buyout (LBO). Note that this classification in Thomson Financial does not
map into the going-private definition used in EHW.18 For instance, EHW carefully eliminate
cases where the acquirer is a foreign company and where the target is in bankruptcy or
liquidation. While eliminating these firms is desirable in assessing the impact of SOX, I simply
intend to illustrate time trends in buyout activity around the world. Towards this end, I eliminate
duplicate deals and entries involving the same buyout transaction. I then aggregate the data into
three country groupings: the U.S., the U.K., and the rest of the world.
Table 3 presents the number of deals, the total US$ transaction value and the average deal
size in US$ for each year and the three country groupings. Panel A includes all three types of
buyout transactions whereas Panel B is restricted to deals classified as going-private transactions.
Panel A shows a dramatic increase in buyout activity for the U.S., particularly in 2005 and 2006,
consistent with anecdotal evidence. This increase is present in the number of deals and the total
transaction volume, but it is much more pronounced in the latter. Panel B reveals similar patterns
18
I include all three types of buyouts as the distinctions in Thomson Financial appear to be somewhat arbitrary.
According to Thomson Financial, the “Going Private Flag” indicates that a private acquirer or a financial
sponsor is acquiring a public target and upon completion, the target will no longer have any of its shares traded
on the public market. However, given the definitions for LBO and MBO, it seems that a going-private
transaction could also be classified as an LBO or MBO if it was highly leveraged or involved management.
19
when focusing on going-private transactions only, except that the increase in going-private
transactions is not monotonic, i.e., it exhibits a small spike in 2003 but reaches its maximum in
2006. In either case, there is a clear upward trend in buyout activity in the U.S. The main
question, however, is whether or to what extent this trend is attributable to SOX.
To address this question, I examine buyout and going-private trends in the U.K. and the rest
of the world and use them as a benchmark. Panel A shows that buyout activity has also risen in
other countries around the world. In fact, the percentage increase in buyout volume averaging
three years before and after SOX is similar for the U.S. and the rest of the world. This evidence
speaks against a significant SOX effect. Similarly, the average deal size has been increasing over
time in the U.S. (and other countries), which is also not what we would expect to see if the recent
trends were fueled by SOX. SOX has been particularly costly to smaller firms and, hence, even if
the response to SOX was delayed (e.g., due to the compliance extensions granted to smaller
firms), we would expect to see that the average deal size falls, rather than increases, as more firms
are driven off the public markets.
Panel B shows that the U.K. and the rest of the world also exhibit a substantial increase in
going-private activity in recent years, particularly in terms of transaction value, but the percentage
increase is much smaller than in the U.S. Moreover, in the U.S., there is a clear spike in goingprivate activity in 2003, together with a decrease in average deal size. Both of these observations
could be indicative of a SOX effect. But again, it is instructive to compare the U.S. trend with
those in other countries. Panel B shows that both the U.K. and other countries around the world
exhibit a spike in going-private activity in 2003. Moreover, there is an even more pronounced
decline in the average deal size for the rest of the world (excluding the U.K.) in 2003. Thereafter,
the average deal size steadily increases, with the U.S. leading the way.
Finally, Figure 1
illustrates graphically how closely world-wide trends in going-private transactions move together.
20
Based on this (admittedly simple) comparative evidence, it seems unlikely that the goingprivate patterns in the U.S. reflect a pronounced SOX effect.19 In my view, the emergence of
private-equity firms and the widespread availability of debt financing for buyout transactions are
likely to be the key drivers behind the recent trends around the world. For instance, Standard &
Poor’s Leveraged Buyout Reviews in Q2 2006 reports that the leverage multiple of buyout deals
has been steadily increasing since 2001.
My second comment on EHW pertains to the interpretation of going-private announcement
returns. EHW’s framework suggests that going-private announcement returns can be interpreted
as an estimate of the net costs of SOX (i.e., the benefits from avoiding compliance with SOX)
minus any net benefit to being public. As this framework focuses on efficiency arguments and
abstracts from agency considerations, the net benefit of being public prior to SOX is by revealed
preference (weakly) positive. Put differently, the observed announcement returns provide a lower
bound on the net costs of SOX to firms that choose to go private.
Based on this interpretation, the going-private announcement returns (EHW, Table 3) imply
that the net costs of SOX exceed 23% of the market capitalization of going-private firms. In my
view, this effect is simply too large to be solely attributable to SOX, especially considering that
investors presumably expect firms to go private with some positive probability. Any anticipation
implies that the unconditional market response to going private and hence the net SOX costs are
much higher. And they would have to be even larger if the net benefit from being public is
strictly positive.
19
Interestingly, many going-private firms come back to the public equity markets after some time. Aramark
Corporation is a case in point as it has gone private twice in recent years. If SOX compliance costs are a reason
for going private, we expect fewer firms to be taken public in future years.
21
Thus, an alternative interpretation, which EHW acknowledge, is that the net value of being
public is negative, possibly due to some unresolved agency problems between the controlling
insiders and the minority shareholders. In this case, the positive announcement return not only
reflects any compliance costs that are avoided but also any value that is “unlocked” in going
private.
Thus, this alternative interpretation suggests that going private confers substantial
benefits to minority shareholders, e.g., by partially reversing valuation discounts due to
unresolved agency problems.20 From this perspective, it might even be a benefit if SOX induced
some firms to go private.
In fact, this interpretation of the evidence is consistent with a small but growing body of
research suggesting that SOX and its provisions have increased the scrutiny that public firms face,
as intended by policy makers, and that this additional scrutiny has had several positive effects.
For instance, Cohen et al. (2006) find a decline in earnings management and an increase in the
informativeness of firms’ earnings announcements. Ashbaugh et al. (2006) present evidence
pointing to cost of capital benefits from resolving internal control deficiencies. This finding may
raise the question of why firms did not resolve these deficiencies earlier, given the documented
benefits. However, as Hochberg et al. (2007) emphasize, corporate insiders may be reluctant to
give up their private control benefits (see also Greenstone et al., 2006). Thus, both the evidence
in Hochberg et al. (2007) that firms that lobbied against a strict implementation of SOX and the
findings of Ashbaugh et al. (2006) can be viewed as supporting the idea that SOX and its
provisions mitigate unresolved agency problems between corporate insiders and outside investors.
Similarly, Leuz et al. (2007) present evidence consistent with the notion that firms go dark partly
20
Similarly, and consistent with this interpretation, Leuz et al. (2007) show that firms that file a Schedule 13E-3,
which is intended to protect minority shareholders, exhibit significantly less negative returns to going-dark
announcements.
22
in response to the additional scrutiny of SOX and that outside investor protection is taken more
seriously in the post-SOX environment. Finally, Berger et al. (2006) show that stock market
reactions to SOX are more positive for foreign firms from countries with weaker enforcement of
investor rights, suggesting that SOX improves the protection of outside investors in those firms.
In my view, the announcement return results in EHW are consistent with these studies and
contribute another important piece of evidence to this growing body of literature.
4.
Conclusion
This paper discusses evidence on the costs of the Sarbanes-Oxley Act (SOX) from stock
returns and firms’ going-private decisions. Zhang analyzes stock returns around key legislative
events and concludes that SOX and its provisions have imposed significant net costs on firms.
EHW examine going-private decisions before and after SOX and point to potentially unintended
consequences of the Act.
Both studies deserve significant praise for taking on an important and timely issue. Their
analyses are carefully conducted and present interesting empirical evidence. While the evidence
is not conclusive in all respects, the studies cover important ground and clearly contribute to the
literature. My discussion of these studies focuses on the interpretation of the evidence and, in
particular, the issues of whether there is evidence that SOX imposes net costs on firms and
whether their findings can in fact be attributed to SOX, rather than general market trends and
concurrent events. For instance, NYSE and NASDAQ changed their listing requirements in
response to the corporate scandals around the same time SOX was passed. Besides, some
changes to U.S. governance practices would have taken place irrespective of SOX, simply due to
market pressures after the scandals, which again makes estimating the marginal effect of the SOX
provisions difficult.
23
The main problem for Zhang’s study is that we lack a good control group of unaffected firms
and that the event windows are fairly long and clustered in time, all of which makes it difficult to
attribute the negative event returns to SOX. In fact, other concurrent news (e.g., about the
impending war in Iraq) and general market trends around the passage of SOX suggest that
Zhang’s results likely overstate the negative effect of SOX on U.S. firms, despite the fact that it is
not implausible that SOX imposes net costs on at least some firms.
EHW also face a benchmark problem with respect to trends in firms’ going-private decisions.
It is much less severe but still important. In fact, while going-private activity has substantially
increased in recent years, there is little evidence that SOX is responsible for this trend. EHW
show based on going-private announcement returns that SOX is more costly for certain groups of
firms, i.e., smaller firms with greater inside ownership.
However, the large positive
announcement returns can also be interpreted as suggesting that going private is able to “unlock”
firm value for minority shareholders. Thus, even if a going private trend in response to stricter
regulation existed, it is not clear that such a trend should be viewed negatively.
This discussion highlights that we need to exercise caution in interpreting evidence on the
costs of SOX, be it from event returns or going-private decisions. More generally, my discussion
raises questions about popular claims that SOX has been excessively costly to firms. But I hasten
to add that it would not be surprising if one-size-fits-all regulation imposed significant net costs
on firms. Moreover, it is possible that SOX set off incentives to overspend on internal controls
because managers and directors bear only a small fraction of the compliance costs but share
disproportionately in a liability from control deficiencies (Coates, 2007). Presently, however, we
do not have much SOX-related evidence to support the conclusion that SOX has been excessively
costly. In fact, there is evidence that SOX has increased the scrutiny that public firms face, as
24
intended by Congress, and that this effect has produced certain benefits. But the net effects on
firms or the U.S. economy remain unclear.
In the end, we need more research on these important issues. But rather than studying the
overall costs and benefits of SOX, which is fraught with many empirical difficulties, researchers
could focus on the implementation of SOX by the SEC and the PCAOB as well as changes in
SOX implementation over time. These events likely offer tighter settings and hence could result
in more progress. Along those lines, it might also be interesting to examine empirically how the
SEC’s enforcement behavior has changed in recent years and what (incremental) role the newly
created PCAOB assumes when it comes to enforcing securities laws.
25
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26
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27
Table 1: Economic and Political News in the U.S. and Around the World on Key Legislative Events Related to the Passage of SOX
This table presents key headlines from daily New York Times news summaries published on key legislative event dates. The table focuses on the four event windows
that exhibit significant event returns (see Zhang, 2006, Table 2). The first column below refers to the event number in Zhang (2006), the next two columns provide the
date and page of the news article. The fourth column gives the headline and the last column provides salient quotes from the articles.
Event
Date
Page
Headline
1
2/2/2002
A1
1
2/2/2002
C1
14
7/8/2002
A1
Congress to Debate Plan For a New
Security Agency
14
7/8/2002
A1
Economy Still Pushing Ahead
14
7/10/2002
A1
14
16
7/11/2002
7/18/2002
C9
A1
U.S. Considers Wary Jordan As Base
for Attack on Iraq
The Bear Market Worsens
Congress Presses on Iraq Plan
16
7/19/2002
A1
House Committees Overruled
16
7/19/2002
A3
Bush Renews First-Strike Vow
16
7/20/2002
A1
Stocks Tumble Again
16
7/21/2002
A1
Bush Economic Team Faulted
16
7/22/2002
A1
WorldCom Files for Bankruptcy
16
7/23/2002
A1
Stock Prices Continue to Fall
17
7/24/2002
A15
Opposition to Security Bill
17
7/25/2002
A1
Deal on Corporate Crackdown
17
7/25/2002
A1
Stocks Break Losing Streak
A Nation challenged: Bush Seeking
Big Rise In Military Spending
Economy Remains Weak
Quotes
The Bush administration wants to increase the Pentagon's yearly budget by $120 billion over five years, to
$451 billion in 2007, according to Defense Department documents.
The unemployment rate fell to 5.6 percent from 5.8 percent in December, but economists called the drop a
mirage. Consumer confidence and manufacturing declined slightly. […] Auto sales in the United States fell
5.1 percent in January compared with the same month a year earlier.
The federal government begins to reorganize itself in earnest this week to respond to a new world of terror
and domestic unease, as Congress returns from recess to a dizzying round of votes on creating a
Department of Homeland Security by summer's end.
Scandals continue to crash through executive suites. The threat of terrorism hangs in the air. Stock markets
have tumbled. And through it all, the economy has pushed forward, to the surprise of a number of analysts.
To many economists, the recovery's stamina depends on whether the falls from grace in corporate America
continue long enough to dent consumers' resilience.
American military planners are considering using bases in Jordan to stage air and commando operations
against Iraq in the event the United States decides to attack, senior defense officials said.
The S.& P. 500 and the Nasdaq sunk to their lowest levels since 1997.
Democrats and a growing number of Republicans want the White House to provide a public accounting of
plans for ousting Saddam Hussein.
House Republican leaders said they would give the administration almost all it wanted in a new
Department of Homeland Security, short-circuiting committee efforts to maintain jurisdiction over agencies
by keeping them out of the new department.
President Bush assured troops just back at Fort Drum, N.Y., after serving in Afghanistan that the United
States would preemptively strike countries developing weapons of mass destruction.
Stocks continued their plunge yesterday in a four-month rout that has sent the major indexes below their
lows of last September and to levels that, if they hold, will make this the worst year for the market since the
1970's.
President Bush's economic team is facing criticism for not responding sufficiently to growing economic
and political pressures. […] By the end of last week, the investor trust on which the bull market of the
1990's had been founded seemed to have almost entirely vanished.
WorldCom, the telecommunications company hurt by an accounting scandal and a rapid erosion of its
profits, has submitted the largest bankruptcy filing in United States history.
The stock market fell sharply again, as investors seemed to fear a slowdown in the world economy and
shrugged off President Bush's statement that ''there is value in the market'' now.
Many House Democrats are considering voting against the proposed Department of Homeland Security
tomorrow, citing ideological differences with some Republican provisions.
House and Senate negotiators agreed on an overhaul of corporate fraud, accounting and securities laws.
Final approval is expected in days, and President Bush says he will sign it.
The Dow surged 488 points, or 6.4 percent, to 8,191.29. The S.& P. 500 gained 5.7 percent.
Table 2: Trends in the Volatility Index (VIX) for the S&P 500
This table presents averages for the S&P 500 volatility index (VIX) from the Chicago Board of Trade. Panel A
presents the average levels in 2000, 2001 and 2002. Panel B presents the averages for the weeks before and after
9/11/2001 as well as the key legislative SOX events from Zhang (2006). Panel C reports averages for the months
around September 2001 and July 2002.
Panel A: Yearly averages
Year
Time Period
Average VIX
2000
1/01/2000 – 12/31/2000
23.32
2001
1/01/2001 – 12/31/2001
25.75
2002
1/01/2002 – 12/31/2002
27.29
Panel B: Weekly averages around 9/11/2001 and SOX-related events
Week
Time Period
Average VIX
Week -1 (911)
9/04/2001 – 9/07/2001
27.95
Week +1 (911)
9/17/2001 – 9/21/2001
41.52
Week +2 (911)
9/24/2001 – 9/28/2001
34.95
Week -1 (SOX)
7/01/2002 – 7/05/2002
28.15
Event 14 (SOX)
7/08/2002 – 7/12/2002
31.87
Event 15 + 16 (SOX)
7/15/2002 – 7/19/2002
36.08
Event 16 + 17 (SOX)
7/22/2002 – 7/26/2002
40.29
Week +1 (SOX)
7/29/2002 – 8/02/2002
34.70
Panel C: Monthly averages around 9/11/2001 and SOX-related events
Month
Time Period
Month -1
Average VIX
August 2001
21.86
September 2001
35.07
Month +1
October 2001
35.24
Month +2
November 2001
26.63
Month -1
June 2002
25.27
SOX
July 2002
34.05
Month +1
August 2002
33.74
Month +2
September 2002
37.65
911
Table 3: Buyout- and Going-Private Patterns around the World
This table presents buyout- and going-private patterns across time for the U.S., the U.K., and the rest of the world. The data is from Thomson Financial Banker
One. The sample includes all deals that are announced between 1/1/1999 and 12/31/2006 and that are classified by Thomson Financial as a going-private (GP),
management buyout (MBO) or leveraged buyout (LBO). I eliminate duplicate entries in the database and aggregate deals by year, type, and target country (i.e., the
U.S., the U.K., and the rest of the world). I keep all deals for which information on the year, type, acquirer name and country, target name and country are nonmissing. But I do not require the ownership percentages sought and/or the transaction value, which for some deals are missing. Panel A reports the number of GP,
MBO, and LBO deals, the total transaction value of all deals (in mill. US$) and the average deal size (in mill. US$) by year and region. The latter two statistics
apply only to deals with non-missing transaction values. Panel B reports the same three statistics as Panel A but for going-private transactions only. The bottom
row in each panel computes the percentage increase averaging three years before and after SOX, i.e., from 1999 to 2001 and from 2003 to 2005.
Panel A: All Buyout Deals
U.S.
U.K.
Rest of the World
Year
Number
of Deals
Transaction
Value in $
Avg. Deal
Size in $
Number
of Deals
Transaction
Value in $
Avg. Deal
Size in $
Number
of Deals
Transaction Avg. Deal
Value in $
Size in $
1999
283
38,614
197.01
504
25,419
77.03
577
31,510
100.35
2000
416
43,112
170.40
443
28,412
102.20
696
31,165
97.39
2001
256
15,964
102.33
415
19,928
87.02
587
33,467
125.34
2002
264
29,212
198.72
346
19,723
106.61
510
60,650
237.84
2003
272
28,707
164.04
387
37,480
173.52
618
49,838
156.23
2004
383
79,319
406.76
377
27,491
147.01
614
73,413
260.33
2005
552
118,697
505.09
340
42,602
215.16
816
123,548
346.07
2006
745
387,288
1,304.00
324
82,514
539.31
1028
225,342
495.26
3-year avg. preand post-SOX
26%
132%
129%
-19%
46%
101%
10%
157%
136%
Table 3: Buyout- and Going-Private Patterns around the World (continued)
Panel B: Going-Private Deals
U.S.
U.K.
Rest of the World
Year
Number
of Deals
Transaction
Value in $
Avg. Deal
Size in $
Number
of Deals
Transaction
Value in $
Avg. Deal
Size in $
Number
of Deals
Transaction
Value in $
Avg. Deal
Size in $
1999
113
17,669
165.13
66
9,813
150.96
125
13,045
117.53
2000
117
18,666
169.69
56
9,503
169.70
151
11,093
80.97
2001
92
9,250
102.77
36
3,388
94.11
133
12,129
101.08
2002
98
11,765
133.70
29
2,680
92.41
145
29,096
225.55
2003
128
10,899
94.78
39
17,753
467.17
183
15,859
104.34
2004
85
39,609
471.53
22
4,555
227.77
131
18,531
159.75
2005
107
74,195
734.60
37
18,325
555.30
140
43,177
369.03
2006
163
301,992
1,960.99
38
22,389
678.45
243
93,009
467.38
3-year avg. preand post-SOX
-1%
174%
197%
-38%
79%
201%
11%
114%
111%
1
Figure 1: Going-Private Trends around the World (Number of Deals)
This figure presents going-private trends for the U.S., the U.K., and the rest of the world. The data is from Thomson Financial Banker One. The sample includes
all deals that are announced between 1/1/1999 and 12/31/2006 and that are classified by Thomson Financial as a going-private transaction. The figure reports the
number of deals in the U.S., the U.K. and the rest of the world.
Going Private - Number of Deals
300
250
Deals
200
U.S.
U.K.
Rest of the World
150
100
50
0
1999
2000
2001
2002
2003
2004
2005
2006
Years
2