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How Much Does Sarbanes-Oxley Cost?

Posted By Barry Ritholtz On June 18, 2005 @ 6:42 am In Economy,Finance,Investing,Markets,Politics | Comments Disabled

There’s a meme circulating now amongst the sloping forehead crowd that Sarbanes-Oxley [1] costs exceed $1.4 trillion dollars. The way that was calculated was the drop in stock market market capitilization during July 2002 when the legislation was passed.

Somehow, SOX gets the entire responsibility for that July 2002 sell off; Even more amusing, SOX gets none of the credit for any subsequent rise in market capitilization since then — it simply gets ignored; Further, this researcher thinks that the only factor impacting market action was Congressional legislation — and not all legislation, just SOX. (Recall we previously addressed that  analytical foible in Single vs. Multiple Variable Analysis in Market Forecasts [2]).

That’s quite a neat analytical trick (putting aside false assumptions, and a more or less total ignorance of what actually drives markets).

I have no stake, and less of an opinion, in Sarbanes Oxeley. But I have zero tolerance for intellectual dishonesty. So let’s take one more review this bit of misdirection:

How Much Did Sarbanes-Oxely Impact Markets?

Market Action Leading up to the Legislation’s Debate and Passage (1/99-12/02)
Click for larger chart

Nasdaq_chart_sox [3]

Source: BigCharts [4]

Market’s Performance Since Sarbanes Oxley (7/02-6/05)
Click for larger chart
Post_sox_nasdaq_chart [5]

Source: BigCharts [4]


The charts prove how ridiculous the assertion is that SOX cost the market’s a over a trillion in cap:

a) intelligent and experienced investors know that no single factor can take credit for what the markets do;
b) The prior trend pre-SOX was a long and relentless slide down;
c) Nasdaq was in the process of bottoming around the same time;
d) the Nasdaq has doubled since Sarbanes Oxley passed!

Let me again reiterate my long standing belief that no single variable accurately predicts market behavior as discussed here: Single vs. Multiple Variable Analysis in Market Forecasts [2].

Further, as I discussed extensively in Lose the News [6], headlines do not drive markets, as the news reporting tends to be rearward looking and already discounted by markets.

Additionally, I point you to Gary B. Smith’s  analysis of major events [7], which supports the argument that even extremely significant news events — The Pearl Harbor attack, the Assassination of JFK, and the September 11th Terrorist Attacks — do little than temporarily roil the markets for a relatively short period of time. After the immediate impact of these events, markets subsequently resume their prior, pre-event course. 

Lastly, have a look at the WSJ’s [8] "Numbers Guy [8]". Carl Bialik took a look at SOX [9]. Not surprisingly, he found the analytical rigor of this study wanting:

The $1.4 trillion in market losses [Rochester accounting graduate student Ivy Xiying Zhang] identifies came almost
entirely during three periods, all in July 2002: the Senate’s debate of
the bill from July 8-12, during which time President Bush delivered a
speech backing corporate reforms; a period from July 18-23 when the
House and Senate wrangled over competing versions of the bill; and a
period from July 24-26 when the Senate and House reached agreement. The
market tanked in that second period, reflecting about three-quarters of
Ms. Zhang’s estimated losses.

If are all really, really lucky, than perhaps Ms. Zhang will be on the other side of our trades in the future. Let’s hope she knows more about accounting than she does about how the markets work.   


How Much Is It Really Costing To Comply With Sarbanes-Oxley? [9]
Carl Bialik
WSJ, June 16, 2005

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2005/06/how-much-does-sarbanes-oxley-cost/

URLs in this post:

[1] Sarbanes-Oxley: http://www.sarbanes-oxley.com/

[2] Single vs. Multiple Variable Analysis in Market Forecasts: http://bigpicture.typepad.com/comments/2005/05/single_vs_multi.html

[3] Image: http://bigpicture.typepad.com/.shared/image.html?/photos/uncategorized/nasdaq_chart_sox.gif

[4] BigCharts: http://bigcharts.marketwatch.com/intchart/frames/frames.asp?symb=comp&time=8&freq=1

[5] Image: http://bigpicture.typepad.com/.shared/image.html?/photos/uncategorized/post_sox_nasdaq_chart.gif

[6] Lose the News: http://www.thestreet.com/_tscana/comment/barryritholtz/10228215.html

[7] Gary B. Smith’s  analysis of major events: http://www.thestreet.com/funds/gbs/10001103.html

[8] WSJ’s: http://online.wsj.com/page/0,,2_1125,00.html

[9] look at SOX: http://online.wsj.com/article/0,,SB111885041027560378,00.html

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