Sunday, December 31, 2006

Sarbanes-Oxley Act considerd harmful

From IBD via
'Tis the season for predictions for the year ahead, something we've always been loath to do because, well, we don't like being wrong any more than the next guy. In the spirit of this special issue of IBD, however, we've come up with seven forecasts — let's call them "possibilities" — for 2007 based on what we see as key developments as '06 wound down. Herewith is our list, offered on the condition we're not held to it.

Major U.S. stock indexes were up solidly in 2006. The Dow's near its all-time high. Yet there's something rotten at the heart of America's markets, and that something is the 2002 Sarbanes-Oxley Act.

SarBox has put a hammerlock on America's small-time capitalism like no other law before. It's keeping small, innovative companies from getting the capital they need to grow and thrive. Along with the growing number of high-profile lawsuits against companies for what turn out to be differences of accounting opinion, U.S. capital markets are hurting.

Loss of share to places such as London, Tokyo and Hong Kong extends even to IPOs. In the late '90s, U.S. capital markets attracted 48% of all global IPOs. This year, it's a pathetic 8%. In 2005, a shocking 24 of the 25 largest new issues were outside the U.S. We once owned that business.

The reason for the U.S. decline? As University of Chicago economist Luigi Zingales noted in a recent study, it's due to "excessive regulation and overly burdensome litigation risk" after Sarbanes-Oxley.

By the way, this can also be seen in the surge of once-public companies now going private. As the chart shows, net equity issuance in the U.S. — a measure of how much equity is actually available on U.S. markets — has gone into an alarming decline since SarBox. The trend has accelerated as more companies go private.

It's pretty simple: Company CEOs, faced with lawsuits, a growing list of SEC requirements and the costs that go with both would rather be private and not have the headaches than list on a major exchange and be harassed daily. The SEC has eased some SarBox rules, but needs to do more to restore America's competitive edge.

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