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Thursday, December 15, 2005

Regulations: Making It Harder Without A Benefit

NYC is losing business to London allegedly due to the imposing regulatory burden of the regulations of Sarbanes-Oxley. CNN Money reports:

Non-U.S. IPOs on the main London Stock Exchange raised over $16 billion this year, compared to $3.4 billion on the NYSE, according to Thomson Financial. That's an abrupt shift from 2004 and 2003, when New York outranked London.

New companies from Russia and Eastern Europe are raising capital at 2 London exchanges and not even considering NY due to regulations.

Passed after the Enron/Worldcom financial fiascoes, the idea of the law is to force the public disclosure of a company as well as th assurances by executives that the disclosures are accurate. This has led to massive compliance costs and personal exposure of CEOs.


As Cato economist Alan Reynolds explained, we have another law that focuses on the acts of businessmen without examining the effect of existing regulation by government upon business activities. Besides being unnecessary and harmful, Reynolds wrote:

Finally, it is inadequate because it failed to encourage the development of institutions and incentives (including an excessive incentive to retain earnings before the individual tax on dividends was reduced) to improve corporate governance over the long haul.

Other problems, per Reynolds, that is caused by the law:

1. Sarbanes-Oxley makes it harder to attract and retain qualified directors, particularly the required financial expert.

2. Sarbanes-Oxley reduces the availability of liability insurance for directors and officers, and greatly increases the cost of such insurance for those who can get it.

3. Sarbanes-Oxley makes it harder (particularly for smaller firms) to attract and retain qualified CEOs and CFOs.

4. Sarbanes-Oxley appears likely to make executives overly timid, afraid to take make bold investments in risky new technologies or products.

So in an era of global competition, we have tied the hands of executives while doing what Congress always does- pass laws that grant more power to government while existing governmental oversight originally failed. It is the New Deal comedy of errors all over again.

But then doesn't Professor Thomas Sowell always lecture us that everything has a cost?

Stocks are not sold with warranties, express or implied. They are always sold "as is." Risk is the very reason stocks exist in the first place -- and nobody is forced to buy them...Politicians are forever coming up with "solutions" to virtually every imaginable imperfection in life. But, if we give them more power and more of our money, we are very unlikely to end up better off on net balance.

The history of 20th century despotism is a history of leaders claiming to solve their people's problems for them -- and then creating tragedies worse than any of the problems that they were supposedly going to solve. Eternal vigilance is only part of the price of freedom. The maturity to live with imperfections is another crucial part of the price of freedom.


We have millions of Americans afraid of freedom. They are destined to look to the government for safety. They should just grow up.

Thanks to Bill Suda for the original article from CNN Money.

5 Comments:

At 4:40 AM, Blogger soxwatch said...

The problem with Sarbanes-Oxley is that regulators are trying to do two things at once: protect investor confidence and help companies avoid fraud. But the problem is this: how do you protect investor confidence without shackling entrepreneurialism? If you want to read more on this, check here

 
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