Another path to growth: fix SOX

Cite this Article
Larry Ribstein, Another path to growth: fix SOX, Truth on the Market (January 25, 2011),

Yesterday I noted, anticipating the President’s call tonight for spending to encourage US growth and competitiveness, that “a better way to increase U.S. competitiveness is by changing the law rather than spending money.” 

One law to consider is Sarbanes-Oxley. 

In our book, The Sarbanes-Oxley Debacle, Butler and I discuss, among other things, SOX’s effect on innovation.  We noted how SOX internal reporting requirements tax change and innovation, as well as particularly burdening smaller, riskier firms which are important sources of innovation.

Now we have some evidence of this effect:  Waters, The Effect if the Sarbanes-Oxley Act on Innovation.  Here’s an excerpt from the abstract:

This paper adds to the literature on the Sarbanes-Oxley Act’s net effects by looking at whether its passage was associated with a change in innovation and patenting. Its effects are separated into temporary uncertainty and changes in long term investment incentives in a dynamic programming problem faced by innovators who learn over time about SOX’s effect. Innovation is found to fall under uncertainty for potential losses that are low relative to the potential profits. As companies learn, innovation rates readjust to SOX’s long term persistent effect. We examine US patenting in stem cell technologies from 2001 to 2009 for SOX related changes. * * * We find a large and statistically significant change at a date consistent with a SOX effect under both testing methods. * * * Four competing explanations are found to account incompletely for the observed data.

A simple fix Congress might consider:  Let the shareholders decide if SOX is worth the costs.  We’ve got “say on pay.”  How about “say on SOX”?