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Sarbanes-Oxley: Threatening Innovation?
Sarbanes-Oxley has been criticized for hitting companies with huge costs with limited real benefits. Many claim that the costs of Sarbanes-Oxley regulations are driving away new company listings from the US to foreign stock exchanges, especially the UK.
Now a study by Kenneth Lehn from the University of Pittsburgh School of Business claims that Sarbanes-Oxley is also destroying company innovation. Because of the regulations, companies are selecting risk-adverse directors for their boards, and consequently, companies are following more bland, less-innovative approaches. The study cites statistics of how overall research and development investments are shrinking in the US as companies here have a greater preference to horde cash, while at the same time, long-term R&D investments are growing in the UK.
The study was based on financials from 4239 publicly traded US companies and 989 companies in the UK. The study also found that the number of IPOs in the US that are from companies from industries that tend to have large R&D expenditures dropped significantly. But then, IPOs in the US in general have been lackluster following Sarbanes-Oxley.
The bottom line is that regulations like Sarbanes-Oxley may be hurting overall US competitiveness.
