A Lobbying Approach to Evaluating the Sarbanes-Oxley

We evaluate the net benefits of the Sarbanes-Oxley Act (SOX) for shareholders by studying the lobbying behavior of investors and corporate insiders to affect the final implemented rules under the Act. Investors lobbied overwhelmingly in favor of strict implementation of SOX, while corporate insiders and business groups lobbied against strict implementation. We identify the firms most affected by the law as those whose insiders lobbied against strict implementation. Lobbying firms appear likely to be characterized by agency problems, rather than primarily motivated by concerns over high compliance costs. We compare the returns of lobbying firms to the returns of less affected firms. Cumulative returns during the five and a half months leading up to passage of SOX were approximately 7 percent higher for corporations whose insiders lobbied against one or more of the SOX disclosure-related provisions than for similar non-lobbying firms. Analysis of returns in the post-passage implementation period indicates that investors' positive expectations with regards to the effects of these provisions of the law were warranted.