Sarbanes-Oxley helps cost of capital: study.

• Author: Marshall, Jeffrey
• Position: Regulation

Despite current calls in Congress to ease the impact of the Sarbanes-Oxley Act, an MIT Sloan School of Management professor and coauthors find that the Act's reporting and disclosure standards have brought significant financial benefits for businesses, including smaller firms that some have been seeking to exempt from the law.

Far from just adding to corporate costs, says MIT Sloan Assistant Professor Ryan LaFond, "our findings tell a very different but consistent story about Sarbanes-Oxley. Firms with strong internal controls already in place and firms that remediate prior control weaknesses are rewarded with a significantly lower cost of capital," which falls by as much as 150 basis points for firms that can demonstrate such compliance.

LaFond compared unaudited financial disclosures by companies prior to Sarbanes-Oxley to audit opinions issued after the law was enacted. "Our results indicate that the market was adding higher costs of capital borrowing even before the formal internal control reporting required by [the law]," he says. "Companies with poor internal controls tend to have poorer quality financial information, which indicates problems to...