Question

Defend the passage of both Regulation FD, and Sarbanes-Oxley and the costs that they impose on the firm in the context of information asymmetry costs.

Answer 1

This paper considers the economic consequences of Pub.L. 107-204, more commonly known as the Sarbanes-Oxley Act of 2002 (SOX). SOX is an act passed by U.S. Congress in 2002 to protect investors from the possibility of fraudulent accounting activities by corporations. The Sarbanes-Oxley Act (SOX) mandates strict reforms to improve financial disclosures from corporations and prevent accounting fraud. SOX was enacted in response to the accounting scandals in the early 2000s. Scandals such as Enron, Waste Management, and WorldCom shook investor confidence in financial statements and brought about an overhaul of regulatory standards. I will address what SOX is, what it does, and the reasons for it; namely, audit and analyst failures. Next I will consider the economic implications of SOX, including its costs, benefits, and market based alternatives. Finally I will discuss the efficiency of the law itself from a Governmental standpoint, ie. litigation regarding SOX. I hope to show that through the Courts and market based solutions regulations such as SOX are inefficient and the practical outcome can be achieved in a more efficient manner