Although the Sarbanes-Oxley Act has come to be known as SOX, it has nothing to do with baseball teams or fancy foot coverings. Like sports teams, however, the law spurs heated debates because it addresses a hot-button topic: corporate accountability. Since SOX was passed in 2002, people have argued whether or not it will indeed improve operations, decrease corporate mismanagement, and thus benefit shareholders. Some insist it will prove detrimental because of high compliance costs and be ineffective in preventing corporate misconduct, and that it will drive companies to list on foreign exchanges.

Annette Vissing-Jørgensen has long discussed SOX with Yael V. Hochberg and Paola Sapienza, her colleagues in the Kellogg School’s Finance Department. Eventually they began a yearlong collaboration to investigate the law’s impact on shareholders, which resulted in their National Bureau of Economic Research Working Paper in 2007. They took an unconventional approach, looking at how companies, individuals, and organizations lobbied the Securities and Exchange Commission (SEC) about SOX. In contrast to other studies, this one shows that positive shareholder expectations about SOX were warranted.

Unlike other legislation such as the 1964 Securities Act, SOX affects all publicly traded companies in the United States. Initial studies of SOX looked at aggregate stock market returns, which led to negative views about SOX. These studies, however, suffered from the lack of a control group of unaffected firms. “Now there is a second generation of papers, including ours, which tries to compare returns for firms that are more affected to the returns of firms that are less affected, thereby canceling out any overall market effect,” says Vissing-Jørgensen.


The Sarbanes-Oxley Act (SOX) is financial disclosure and corporate governance legislation. It was signed into law by President George W. Bush on July 30, 2002. SOX is based on separate finance reform bills introduced and passed in the House and Senate, introduced by Senator Paul Sarbanes, Democrat of Maryland, and Representative Michael Oxley, an Ohio Republican. These bills were merged and passed by the House and Senate as one piece of legislation on July 25, 2002. The intent of SOX was to change financial disclosure practices by companies and to improve corporate governance. SOX included eleven titles, the first four of which are the most relevant for public company compliance. Title I established the Public Company Accounting Oversight Board (PCAOB), charged with overseeing and registering public accounting firms and establishing standards related to auditing and internal controls. Title II of the act covers issues related to auditor independence. Title III deals with corporate responsibilities and Title IV covers issues of enhanced financial disclosure.



The Sarbanes-Oxley Act, signed into law on July 30, 2002, arrived in the wake of the Enron debacle and scandals at companies such as Global Crossing, Qwest Communications, Tyco, and WorldCom. The intent was to change financial disclosure practices at companies and to improve corporate governance.

While the researchers examined how companies and individuals lobbied the SEC about SOX, it was not lobbying in the sense of trying to persuade members of Congress pondering a new law. It was more an attempt to tweak the law’s implementation. “You could define lobbying in this context as those trying to affect the strictness with which these rules are implemented,” says Vissing-Jørgensen.

Congress delegated to the SEC the design of the actual SOX rules and their enforcement strategies. For example, explains Sapienza, “In a provision about the independence of board members, the SEC might propose a particular definition of ‘independent.’” After the SEC first publicized its proposed rules, a period of SEC-solicited public comment followed (August 2002 to June 2004), and then the SEC released the final rules. Hochberg, Sapienza, and Vissing-Jørgensen plowed through a pile of 2,689 letters to the SEC from corporate insiders, investor groups, individual investors, lawyers, accountants, and academics (see Table 1). Lobbying is “in essence revealed preference,” says Hochberg, and it created self-identified groups of those more and less affected by SOX. It also helped avoid the challenge of a lacking control group.

Table 1: Opinions of Letters, by Rule and Type of Commenter

After SOX was passed, the difference between lobbying companies and non-lobbying companies disappeared. “We don’t find any differential effects in the returns between the two groups,” says Sapienza. The lobbying behavior showed the average effect of SOX on shareholders, say the researchers. Their findings suggest that even post-implementation, investors felt they were right to have had a sunny outlook on SOX.

Because firms sometimes lobbied against several categories of SOX, the researchers grouped the law’s sections. One group contained the provisions relating to enhanced financial disclosure, including the much-debated Section 404 and the establishment of the Public Company Accounting Oversight Board. Another grouping included provisions about auditor independence. A third category covered the provisions about corporate responsibility, such as the necessity for management to certify financial reports.

In order to isolate separate effects, the team performed firm-level regression analysis. “All the positive effect from SOX came from the enhanced disclosure provisions, which included Section 404,” says Vissing-Jørgensen. “The companies that were more affected by the enhanced disclosure provisions outperformed companies that were less affected by the enhanced disclosure provisions.” The other groups of SOX rules, auditor independence and corporate responsibility, had comparatively little effect on firms, the researchers say.

Compliance costs were another factor to consider, and were higher than originally estimated. In order to rule out that these costs were so great that they overcame the 10 percent excess returns during the lead-up period, the researchers pulled them into their analysis. “Once you bring in the compliance costs, you can actually say at an absolute level whether the lobbying firms benefited from SOX overall,” says Vissing-Jørgensen. She and her colleagues believe their study shows that the net benefit of SOX is positive for shareholders of lobbying firms.

The researchers plan to continue their analysis by looking at the effect of SOX on small firms. Their recent study focused on large firms, since the lobbying companies were mainly large. The researchers also explain that their study cannot evaluate the losses corporate insiders might experience because of SOX. It cannot draw conclusions about corporate decision-making, for example, the reasons some companies may choose to de-list, stay private, or seek listing on foreign exchanges. Clearly, the debate about SOX is far from over.