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American Firms Shy Away From Risk-Taking

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Is Sarbanes-Oxley discouraging corporate risk-taking in the United States? A new research paper by scholars at the University of Pittsburgh says it is decidedly so. While much of the controversy surrounding Sarbanes-Oxley (SOX) has focused on the costs associated with Section 404 of the law, Kenneth Lehn and his colleagues at the University of Pittsburgh’s Katz Graduate School of Business studied whether Sarbanes-Oxley is directly affecting corporate risk taking. Lehn unveiled the research’s findings at a recent American Enterprise Institute (AEI) event in Washington, and noted that both Sarbanes-Oxley and a highly litigious environment in the U.S. are sparking a decline in corporate risk taking. “Class action lawsuits have grown in the last six or seven years,” Lehn said.

Lehn and his colleagues’ research paper, which is called Bargeron, Lehn, and Zutter: Sarbanes-Oxley and Corporate Risk-Taking, found that compared with a benchmark sample of U.K. companies, since SOX became law, U.S. companies have significantly reduced expenditures on research and development; have significantly reduced capital expenditures–investments in property, plant, and equipment; and have significantly increased their cash holdings. “If you look at the cash holdings of U.S. companies as compared to their U.K. counterparts, companies are hoarding cash,” Lehn said. U.S. firms, he added, are also making investments in low-risk, highly liquid securities like Treasury securities. Also, compared with the benchmark sample of U.K. firms, since SOX the stock price volatility of U.S. firms has declined significantly, the paper revealed.

What’s more, “the probability that an IPO is conducted in the U.K. as opposed to the U.S. has increased sharply” since SOX, Lehn said. Lehn’s paper also reveals what he said is a little known fact that the likelihood of an IPO occurring among research and development firms–like biotech and software–in the U.K. is significantly higher than for a similar firm in the U.S. “The increased probability is not because there has been a dramatic increase in IPOs of high R&D companies in the U.K.,” Lehn points out. “Rather, there has been a significant reduction in the frequency of IPOs in the high R&D companies in the U.S.”

But data culled by Thomson Financial shows that non-U.S. companies still have a healthy appetite for being listed on U.S. exchanges. So far this year, 25 foreign companies have listed IPOs in the U.S.– raising $4.9 billion on U.S. exchanges.


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