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The Sarbanes-Oxley Act and Exit Strategies of Private Firms

Authors


  • Accepted by Jeffrey Pittman. The authors thank the Social Sciences and Humanities Research Council of Canada, the Certified Management Accountants/Canadian Academic Accounting Association Research Grant, and the Rotman School of Management for funding. We thank Business Valuation Resources for the academic use of their Pratt's Stats® Private Transaction Database. We have received helpful comments from Jeffrey Pittman and two anonymous reviewers. The authors additionally thank Phil Berger, Lawrence Brown, Gus De Franco, Jere Francis, Roger Grabowski, Paul Griffin, John Hand, Pierre Liang, Robert Knechel, Theodore Sougiannis, Bin Srinidhi, Jacob Thomas, George Yang, Ivy Zhang and seminar participants at the Rotman Accounting PhD Program 10th Anniversary Conference, the University of Queensland, the University of Technology Sydney, the 2011 American Accounting Association Annual Meeting, the 2011 European Accounting Association Annual Meeting, the 2011 American Society of Appraisers Advanced Business Valuation Conference, and the 2012 Journal of Contemporary Accounting and Economics conference for helpful comments. All errors are our own. Work on this paper was partially completed when Dushyantkumar Vyas was at the University of Minnesota. Gord Richardson is also grateful to KPMG for their financial support.

Abstract

The costs and benefits of the Sarbanes-Oxley Act of 2002 (SOX) have been oft-debated since the inception of the Act. Much of the extant literature has assessed the costs and benefits of SOX to publicly traded companies. We focus on the costs of SOX compliance for private firms wanting to exit the private market via either an acquisition by a public firm or an IPO. Consistent with our predictions we establish two principal findings. First, SOX appears to have shifted the preferences of private firms from going public to exiting the private market via acquisition by a public acquirer. Second, private target deal multiples are increasing in variables that proxy for a private target's level of pre-acquisition SOX compliance. These findings suggest that SOX-related costs have both restricted the action space of possible exit strategies for private firms and led to lower deal multiples for those private acquisition targets that are less likely to be SOX compliant prior to acquisition.

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