Duke Bristow

Regulatory risk, including unintended outcomes, presents a clear and present danger to investors. The Sarbanes-Oxley Act (SOX) significantly impacts entrepreneurs and their investors and constitutes the largest addition to U.S. federal securities laws since the Great Depression. Recent research indicates that, on balance, SOX negatively impacts U.S. and non-U.S. firms seeking U.S. investors, especially smaller firms. Negative SOX impacts were grossly underestimated. Section 404 was estimated at $91,000 per firm but actual costs were $3.8 million per firm – an over 40 fold mistake costing investors over $50 billion on just one section of SOX. Research on aggregate net impacts, including large indirect costs, indicates that the U.S. market lost over $1 trillion around key SOX events. To these enormous, unintended and underestimated costs, this paper adds a new and perhaps more serious unintended outcome of the SOX risk. This paper is the first to estimate that U.S.-based initial public offering (IPO) activity appears to have had a net shortfall of approximately 1,650 U.S. IPOs in the post-SOX era. Furthermore, SOX increases delistings, adversely affects cross-listing activity, and has played a role in the rise of London’s Alternative Investment Market Exchange (AIM) listings. However, the rise in London only partially offsets the fall in the U.S. Thus, SOX presents a new potent variety of regulatory risk that contributes, to a decline in the pre-eminence of the U.S. financial markets, the ascendancy of the AIM, with a likely net loss to future global growth and innovation.