The premium reflects more than regulation, Karolyi adds. “It’s about all the monitors in the U.S. capital markets, whether it’s analysts, large institutional investors, lawyers, or accountants.”
LaFond acknowledges that the benefits of Sarbox are difficult to quantify. “We decided with our study that we were going to look at one benefit — the cost of capital — and we can say it doesn’t look like [the legislation] has been a complete loss,” he says. “I’m very comfortable saying there are some benefits, and they are economically meaningful. Whether they exceed the costs, I have no idea.”
Still, LaFond says, that’s partly because cost estimates themselves are open to question. He notes that such estimates vary widely and may not include such amorphous elements as management time or the opportunity costs of forgoing other projects to work on compliance issues. Cost estimates may also be skewed by other motivations. “Sarbanes-Oxley has increased the monitoring of management, and nobody likes to be monitored. So management has an incentive to overstate the cost, while auditors have incentive to understate it,” he says. The methodology of some cost studies, such as the University of Rochester analysis that attributed stock-market movement on the day of a Sarbox-related legislative announcement to the act, has been questioned as well.
Even so, market-watchers worry that the regulatory burden imposed by Sarbox has added now outweighs the benefit of a U.S. listing, and that as a result companies will seek capital elsewhere. At the SEC roundtable, Peter Lyons, a partner with law firm Shearman & Sterling LLP, fretted that European companies would hesitate to list in the United States “unless we can demonstrate to them that the benefits to their stock price…outweigh the costs.” The buzz surrounding the London Stock Exchange’s Alternative Investment Market (AIM) seems to support this concern. The AIM has seen 130 initial public offerings this year through May, compared with 48 on Nasdaq. The London exchange touts AIM as offering a “flexible regulatory environment” that does not require a company to file a prospectus or reach a minimum market capitalization.
A Toll Road to Capital
Sarbox proponents argue that companies that are attracted to such a flexible regime may not deserve public capital. “If you want public money, [Sarbox compliance] is the toll you have to pay,” says Calpers’s Wood. “These are the sorts of guarantees that public investors require in order for people to invest their retirement money and their life savings.” She urges regulators not to cater to “lowest-common-denominator” companies in an effort to retain U.S. listings. “If the next U.S. company to go public is going to list on the Shanghai exchange because standards are lower there, my reaction is, let them go. Let other investors take the risk of investing in them.”
As David Warren told a group of venture capitalists in June: “AIM can become a great feeder market for Nasdaq when those firms are ready to trade up.” And, he notes, “We still see companies coming to the United States to list.” (Nasdaq listed 22 international IPOs last year.)