There is a discussion on developing a more lucrative, open, and free market for small firms at this time of commercial and social growth. Early in 2012, the US Congress debated changing Bill S1933’s requirements to make it simpler for small businesses to launch an initial public offering or IPO (Upadhyay & Triana, 2020). After they go public, the modification will enable companies with annual revenues of less than $1 billion to adhere to some Sarbanes-Oxley Act (SOX) regulations. According to Mark Heezen, president of the National Venture Capital Association, some businesses would choose to go public rather than be purchased if given a greater chance to do so.
The public is moving more quickly than anticipated, which will encourage the future development of jobs. The terms of S1933 and the tenor of the discussion surrounding its approval suggest that the expenses of SOX prevent private companies from going public (Upadhyay & Triana, 2020). If private companies choose to be acquired rather than become public, as noted in the remark above, society may have actual costs. Based on these considerations, it is possible to judge if SOX affected the deal and private enterprises’ preferred departure strategies (Upadhyay & Triana, 2020). Private businesses gain money when they sell their products to the general population.
Most 379 companies whose insiders contact the SEC does so by opposing the regulations they advocated for. Agency issues are another characteristic of these specific companies. The authors then create an experiment using these findings on lobbying trends to see if businesses who advocate against SOX would see significantly different shareholder returns than those that do not. They discovered that the shareholders of these lobbying companies received a cumulative anomalous profit of 7% (Upadhyay & Triana, 2020). That was economically significant during that period, which they take as proof that SOX produces net advantages by increasing transparency and governance and decreasing fraud. Insider misdeeds and actions, as well as worries about compliance costs, do not appear to matter.
Here are two opposing views on how SOX affects shareholders. Proponents contend that this improves disclosure, openness, and corporate governance by preventing company management from criminals who are rational beings and engaged in economic crime because they anticipate financial gain and refrain from criminal activity because they anticipate expenses (Gorshunov et al., 2020). Opponents contend that SOX imposes excessively high compliance expenses while having little real impact on how corporate insiders behave. The absence of a control group of publicly traded companies unaffected by the Act is the greatest obstacle to separating viewpoints.
However, HSVJ uses the institutional aspect of the method by which law is transformed into rules by the SEC to address this issue. They specifically identify and group businesses based on the regulations they refer to in their letters and what they say when they choose to remark on specific rules put out by the SEC. Based on the development of the investigations, the SEC put the information on its website and made it accessible to the public (Gorshunov et al., 2020). The critical methodological addition to this article is their deft use of a benchmarking instrument lobbying as an activity.
The importance and profitability of lobbying companies with business insiders who oppose strong SOX adoption are great. Additionally, they hold more capital and have less potential for future expansion, which perfectly describes issues with free cash flow or agency. Comparing them to similar companies that have opted not to lobby, there is no difference in the level or variation of their audit fees. Compared to comparable businesses that decide not to lobby, lobbying firms with corporate insiders who oppose stringent SOX adoption generate more significant cumulative abnormal returns during the SOX period. After passing SOX, these incremental profits remain unchanged.
References
Gorshunov, M. A., Armenakis, A. A., Feild, H. S., & Vansant, B. (2020). The Sarbanes-Oxley Act of 2002: Relationship to magnitude of financial corruption and corrupt organizational cultures. Journal of Management, 21(2), 73.
Upadhyay, A., & Triana, M. D. C. (2020). Drivers of diversity on boards: The impact of the Sarbanes‐Oxley act. Human Resource Management, 60(4), 517–534.