Many have claimed that the Sarbanes-Oxley Act of 2002 has reduced the risk-taking in US companies to a excessively low level. The University of Pittsburg has published a research paper that identifies the decrease in US risk-taking compared to UK firms. The paper shows that US companies have significantly reduced their R&D and capital expenditures and significantly increased their cash holdings since Sarbanes-Oxley was launched.
The paper analyses accounting, stock and flotation data at more than 5,000 UK and US companies pre-SOX and post-SOX and looks at the issue from three perspectives – and finds that each tells a similar story. First, following Sarbanes-Oxley, US companies have reduced expenditures on R&D, reduced capital expenditures, and increased holdings of cash relative to UK firms. Secondly, market risk ratios have decreased relative to the UK. Finally, the likelihood of a share offering in the UK increased significantly after Sarbanes-Oxley and decreased in the US, consistent with the figures that show non-US firms abandoning US flotations and small firms holding back from going to the markets.
"We can't nail it down to Sarbox," says Bargeron, an assistant professor of business administration at Pitt (and a former CFO). "In isolation, any of our measures could be taken issue with, but together they create a preponderance of evidence that is striking."
Whilst there has been much anecdotal evidence of reductions in risk taking in the previously entrepreneurial US industry and the fall in foreign firms going to US markets for funds is apparent, this is the first detailed paper that identifies trends in US management practices relevant to the usage of capital. This will have greater impact on the long-term US economy that the losses of revenues by Wall Street firms.
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