| Is overregulation really hurting the US capital markets? One widely cited piece of evidence from the the Committee on Capital Markets Regulation is that from 2003-2005, the premium for foreign firms that cross-listed in the U.S. was cut nearly in half.
True, Sarbox has proved extraordinarily expensive. But did investors really begin compensating for that in 2003? At the time, most companies, let alone investors, had no idea what compliance would cost. Most didn't find out until the end of 2004.
In fact, the first reference to section 404 by number in CFO magazine (actually in CFO IT) came in an article in March 2003. To be sure, CFO had been reporting that Sarbox had internal control provisions since 2002, but this was the first time the 404 itself was used as a shorthand reference—an acknowledgement of how thorny it might be. Lest anyone argue that we were missing the boat, the same article included a quote from Scott Bohannon, executive director of the Working Council for Chief Financial Officers, noting that "no one knows what the final rules are yet." That organization, part of the Corporate Executive Board, boasts hundreds of blue-chip CFOs as members. While 404 was clearly a serious concern for that group, corporations still had no way of knowing what it would cost.
I'm not disputing that premiums might have fallen because of regulatory costs—I'm just saying this particular piece of evidence isn't terribly convincing. Given the timing, it seems equally plausible that investors were discounting cross-listings on U.S. exchanges because an investment-banker-turned CFO had played America's much-vaunted GAAP like a fiddle, puncturing the long-held conceit that U.S. accounting standards (and the audit firms that enforced them) were vastly superior to those used overseas.
One could just as easily argue investors were waiting for proof that Sarbox had the teeth it needed to prevent future Enrons.
Who's to say which is right? Indeed, another section of the committee's report suggests that the SEC spend more time monitoring Sarbox to understand its true costs and benefits. "With only two years of experience," the report notes, "the fact base relating to Section 404 implementation is still fairly limited." I suppose that depends on the point you're trying to prove.
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