We have been alerted by Corporate Law and Democracy about an article by Robert Prentice at the University of Texas McComb School of Business titled "Sarbanes-Oxley: The Evidence Regarding the Impact of Section 404" .  Reminiscent of my article, Criticizing the Critics:  Sarbanes Oxley and Quack Corporate Governance, the paper focuses specifically on the impact of Section 404. 

The paper reviews the background of Section 404, including its rationale, and notes its success in improving financial reporting.  As Prentice concludes:  "Overall, there is substantial evidence that SOX 404 has helped revive U.S. capital markets, reform corporate governance (which carriers a broad range of benefits), and improve market liquidity, financial reporting accuracy, and fraud detection."  As he notes, even some critics concede that SOX has produced benefits. 

The most interesting part of the paper is the review of the data on the alleged costs, including the direct costs and the impact on competitiveness.  Critics have attempted to argue that the data demonstrates the costs outweigh the benefits.  The paper does a good job dissecting the empirical data without overstating the case.  It notes that much of the data is mixed.  Nonetheless, the data not only does not demonstrate that the costs outweigh the benefits but it also supports the conclusions that any lost business resulted from a race to the bottom (that is, self interest), rather than the harm caused by SOX.  For example, he notes, in the context of the allegations that IPO business is going overseas: 

• "In sum, the people who decide whether and where to have an IPO are heavily influenced, consciously or otherwise, by what is in their own personal best interests.  If they are avoiding U.S. public markets because of SOX 404, it is not at all a given that it is because SOX 404 is not in the best interests of their firms.  More importantly, what SOX in general does is ask individual firms to bear burdens so that the entire capital markets can thrive.  These considerations mitigate in favor of the U.S. urging foreign countries to raise their standards (as they have been doing), rather than lowering U.S. standards."

The paper is balanced, interesting and worth a read.  It makes a strong case that the critics of SOX have not made the case.