WASHINGTON–Sarbanes-Oxley regulations have caused companies to take a more risk-averse track, focusing on building their cash reserves rather than developing new products, according to a professor at the University of Pittsburgh.
Passed by congress in 2002 and aimed at eliminating such scenarios as those of Enron and WorldCom, the Sarbanes-Oxley Act, or SOX as it is known, requires companies to keep tighter controls over their financial reporting and increase the accountability of senior executives.
The regulations, however, also have been the subject of criticism, with many opponents questioning whether their costs outweigh the benefits they provide. Peter Wallison, senior fellow at the American Enterprise Institute, where the results of the study were unveiled, said that SOX "has proved substantially more costly than anyone anticipated."
Additionally, he said, SOX regulation has given competitors to American stock markets an avenue for competition.
The London stock market, he said, now advertises itself as a "SOX-free zone" and has seen an increase in registration for trading there.
"They regard the absence of SOX restrictions as a selling point," Mr. Wallison said.
Kenneth Lehn of the University of Pittsburgh's Katz Graduate School of Business, said the results of a study he conducted involving 4,000 U.S. companies show that U.S. companies operating under SOX have "significantly" reduced their expenditures on research and development, while at the same time increasing their cash holdings as compared to companies in the United Kingdom.
Mr. Lehn said that it is "very tough to nail down causation" in looking at the changes made by U.S. companies in any given time period, however, he said his study sought and found an "association" between those changes and the enactment of SOX regulations.
But SOX alone was not the driving force behind these changes, he added,
"It's not just SOX," Mr. Lehn said "it's the combination of SOX and a highly litigious society in the United States."
Charles Calomiris, a professor at Columbia University, argued that Mr. Lehn's data may be reflective of other factors, including an increase in risk acceptance in the U.K., or a similar rise in entrepreneurial activity. However, the panel members agreed that the evidence laid out by Mr. Lehn's paper establishes a solid support for the argument that SOX regulations have played a role in making corporations shy away from potential risks.
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