There are many analyses of the economic effects that ordinances. in general. and Sarbanes-Oxley Act. in peculiar. hold had on American concern. This analysis looks at the consequence that the Sarbanes-Oxley Act has had on the American banking industry. The return on assets and return on equity were obtained from the Federal Reserve Bank for all SEC-registered and nonregistered Bankss for the period 2000 through 2005. Comparative consequences indicate that during the period that the Act had been in consequence there is a pronounced negative divergency for SEC-registered Bankss as opposed to those Bankss that do non describe to the SEC.

Government ordinances can hold profound effects on industry. Regulation can be defined as the authorities straight ?prescribing and forbiding what private sector agents can and can non make. so that their actions do non belie the ‘public involvement. ’? ( Chang. 1997 ) Ordering or forbiding actions can be both productive and dearly-won for a house every bit good as the populace. The resulting ordinances of the 2002 Sarbanes-Oxley Act ( SOX ) have been described as being dearly-won to U. S. concern. By comparing the returns on assets ( ROA ) and returns on equity ( ROE ) of registered ( SEC describing ) V nonregistered ( nonSEC coverage ) U. S. Bankss. this survey attempts to find if SOX has had a damaging consequence on registered Bankss. The Economic Effect of Regulations Benston ( 1976 ) discussed the U. S. experience of industry ordinance. He noted that one time power is granted to a ?regulatory bureau. they about ne’er contract and about ever expand. regardless of their demonstrated deficiency of efficaciousness for work outing jobs or leaning to make new jobs. ? This is mirrored by Joshi. Krishnan. and Lave ( 2001 ) . Meyer ( 1975 ) . and Peterson ( 1975 ) found that higher costs are normally associated with a regulated environment and that sometimes. the regulative costs are non worth the benefits. This is besides suggested in Hahn’s ( 1998 ) research.

Regulative policies can hold a damaging economic consequence for full industries every bit good as the U. S. economic system. Analysiss of U. S. ordinances indicate that they hinder American railwaies. insurance industry. and public public-service corporations ( Caves. Christensen and Johnson. 1981 ) . ( Darby. 2007 ) . ( Taggart. 1985 ) . ( Pociask and Fuhr. 2007 ) . Sing the U. S. economic system. harmonizing to Gray ( 1987 ) OSHA and EPA ordinances were responsible for over 30 per centum of the economic lag in the 1970’s. Over-regulation ( Harvard Law Review 2003 ) can go counterproductive. Companies can go routinized in regulative conformity in such a mode that they are adhering to the missive of the jurisprudence but non the spirit. Niskanen ( 2007 ) theorized that the U. S. capital markets may be perilously over-regulated. He cites two recent studies: the Committee on Capital Markets Regulation’s study documenting the worsening U. S. fight and the Schumer-Bloomberg Report which warned that U. S. fiscal service grosss would fall between $ 15 billion and $ 30 billion a twelvemonth without a major alteration in the public policies impacting US capital markets.

Regulations besides appear in the signifier of needed accounting revelation and can bring forth good effects. A company’s credibleness can be enhanced by consistent and effectual revelation ( Gibbins. Richardson. and Waterhouse. 1990 ) . Increased revelation benefits houses and the capital markets ( Leuz and Verrecchia. 2000 ) . ( Dhaliwal. 1979 ) . ( Meier-Schatz. 1986 ) . On the other manus compulsory revelation can be cumbrous and dearly-won. Research by Admati and Pfleiderer ( 2000 ) suggests that the diverse nature of industries make it hard to plan effectual cosmopolitan revelation. Harmonizing to Benston ( 1977 ) an incognizant public wages for government-required accounting revelation. Sunstein ( 1999 ) claims that revelation of information allows the federal authorities to command public and private behavior. Foreign Corrupt Practices Act Over the decennaries accounting ordinances have come from assorted beginnings. The Securities and Exchange Commission every bit good as the Internal Revenue Service and Interstate Commerce Commission are illustrations of regulative organic structures that promulgate accounting ordinances. A more recent illustration occurred during the 1970s. During the Watergate epoch there were a figure of probes. some of which affected American concern.

One of the probes. conducted by the Securities and Exchange Commission ( SEC ) in 1975. revealed that 19 publiclyheld corporations had made illegal run parts and that these parts were made from hard currency histories that had non been recorded on the corporation’s books. ( Heldack. 1977 ) This prompted the SEC to establish an probe into what were considered ?questionable payments. ? What came out of the probe was that many U. S. transnational corporations were doing 100s of 1000000s of dollars in ?questionable payments? to foreign functionaries to obtain concern. As a consequence. the Foreign Corrupt Practices Act ( FCPA ) was nem con adopted by Congress in 1977. Bribery of foreign functionaries to obtain concern for the corporation became illegal but the FCPA besides included a 2nd proviso necessitating all publicly-held companies set up an effectual system of internal controls. This was in response to disclosures that payments to foreign functionaries were paid with ?off-the-books? hard currency histories. Some of the research into the effects on American concern by the FCPA indicates that the anti-bribery proviso of the Foreign Corrupt Practices Act has cost the U. S. in footings of doomed concern and competitory advantage. ( Koretz 1996 ) . ( Beck. Maher. and Tschoegl. 1991 ) . ( Kaikati. and Label 1980 ) .

On the other manus there are surveies that indicate the antonym ; that the anti-bribery proviso has been good to U. S. concern. ( Graham. 1984 ) . ( Richman 1979 ) Sing the internal control proviso. Maher ( 1981 ) found that. while some benefits would accrue from the FCPA proviso. it has led to dearly-won conformity attempts. For case. the FCPA affected significantly the internal auditing section budget. One canvass indicated during the period 1978 through 1982 internal audit budgets across the U. S. increased about 79 per centum. ( Baird and Michenzi. 1983 ) National Commission on Fraudulent Financial Reporting During the 1980s there was a figure of direction frauds perpetrated against investors – ( eg. ESM Government Securities and ZZZZ Best ) .

A unit of ammunition of congressional hearings on modulating the accounting profession ensued. As a possible countermeasure by industry a jointly-sponsored committee ( American Institute of Certified Public Accountants. Institute of Management Accountants. Institute of Internal Auditors. Financial Executives Institute. and the American Accounting Association ) called the National Commission on Fraudulent Financial Reporting ( informally called the Treadway Commission ) was chaired by James C. Treadway. former commissioner of the Securities and Exchange Commission. made 49 recommendations many of which were direct toward public companies and regulative bureaus. ( Committee of Sponsoring Organizations. 1987 ) While the recommendations are non considered ordinances per Se. their intent was to stave off farther governmental ordinance.

Among the recommendations were calls for stronger internal controls. more effectual corporate internal audit map and better external hearer fraud sensing. Some of the research that followed these recommendations placed accent in these countries. There were surveies and treatments sing the ensuing increased audit fees and internal control costs. that hearers were hindrances to fraud. and that internal auditing could decrease external audit fees ( Matsumura and Tucker. 1992 ) . ( Copley. Doucet. and Gaver. 1994 ) . ( Schneider and Wilner. 1990 ) . ( Felix. Gramling. and Maletta. 2001 ) ( CA Magazine. 1994 ) . Sarbanes-Oxley Act In response to the Arthur Andersen. Enron and WorldCom-era fiascos. Congress passed ?Public Company Accounting Reform and Investor Protection Act? in July 2002. Sponsored by Mike Oxley ( R-OH ) and Paul Sarbanes ( D-MD ) the Act has become popularly known as the ?Sarbanes-Oxley Act? ( Act or SOX ) .

The intent of the Act is to reconstruct public assurance in both public accounting and publicly-traded securities every bit good as promote better ethical concern patterns through greater executive consciousness and answerability. One of the dearly-won facets to SOX comes from subdivision 404 whereby: Section 404 of the Act directs the Commission [ SEC ] to follow regulations necessitating each one-year study of a company. other than a registered investing company. to incorporate ( 1 ) a statement of management’s duty for set uping and keeping an equal internal control construction and processs for fiscal coverage ; and ( 2 ) management’s appraisal. as of the terminal of the company’s most recent financial twelvemonth. of the effectivity of the company’s internal control construction and processs for fiscal coverage. Section 404 besides requires the company’s hearer to certify to. and study on management’s appraisal of the effectivity of the company’s internal controls and processs for fiscal coverage in conformity with criterions established by the Public Company Accounting Oversight Board ( PCAOB ) . ( SEC 2003 )

The Act is dearly-won to administrate. Both the PCAOB and SEC are adding staff to get by with the extra work necessary to implement the Act. Rouse. ( 2005 ) points out that the PCAOB was established in January 2003 with a staff of eight. By the terminal of 2005 there were more than 450 staff members with a budget in surplus of $ 150 million. The SEC hired an extra 1. 000 staff because of SOX. The Act has had a negative consequence on American industry. Consecutive surveies by the Financial Executives International expound on this consequence. The consequences of a January 2004 study of 321 companies ( FEI 2004a ) indicated the Act cost an norm of $ 1. 3 million in disbursement on external consulting and package. with extra audit fees of $ 1. 5 million ( a leap of 35 per centum ) . ? By July 2004. FEI ( 2004b ) another study indicated the entire cost of conformity was estimated to be 62 % more than the January 2004 study. A 2005 study ( FEI 2005 ) indicated a 39 % addition from the July 2004 study. In a 2007 study ( FEI 2007 ) those companies with market capitalisations more than $ 75 million had an mean cost of internal control conformity to be $ 2. 9 million during financial twelvemonth 2006.

This last study runs counter to Rittenberg and Miller’s ( 2005 ) contention that SOX costs may be leveling-off. Other surveies found similar issues – significant additions in audit fees and negative effects on stock monetary values and the U. S. capital markets taking up to the transition of SOX ( Griffin and Lont. 2004 ) ( Ge and McVay. 2005 ) . ( Solomon and Bryan-Low. 2004 ) . ( Bargeron. Lehn. and Zutter. 2007 ) ( Zhang. 2005 ) . Litvak ( 2007 ) attempted to analyze the costs and benefits of SOX utilizing a intervention group of non-US houses that are cross-listed on the US exchanges and fiting those houses with other non-US houses to command for state. industry. and size. Litvak last event day of the month was October 22. 2002 and found negative returns for the cross-listed houses. This survey besides compares a intervention group of houses subject to Sox with a control group non capable to SOX. but we use US houses in both groups and utilize a concluding day of the month of 2005 to let more clip for the benefits of SOX to attest themselves. We besides examine reported profitableness instead so stock monetary values because stock monetary values are non available for our control group.

Banking ordinances appear to increase the cost of bank operations. Harmonizing to the American Banking Association ( ABA ) and Federal Reserve. ( Simmons. 2005 ) . the cost of ordinance in the banking industry ranges from $ 34 billion to $ 42 billion a twelvemonth. non including the costs of the ?Patriot Act. Sarbanes-Oxley. the GrammLeach-Bliley Act. extra announcements of the Securities and Exchange Commission. Financial Accounting Standards Board. and Public Company Accounting Oversight Board. ? Other surveies found that ordinances add to bank and consumer costs. bound public presentation. while non increasing describing information. ( Benston and Kaufman. 1996 ) . ( Hagerman. 1975 ) . ( Bordo. Rockoff. and Redish. 1994 ) Harmonizing to Jayaratne and Strahan ( 1998 ) it appears that SOX ordinances may hold many of those same idiosyncracies. Fernandez and Toto ( 2005 ) found that SOX increases bank costs and lessenings bank CEO clip handiness to develop new concern. Recently. Siegel et Al. ( 2009 ) found grounds that the Sarbanes-Oxley Act may negatively impact U. S. Bankss.

In an effort to alleviate some of the cost force per unit areas emanating from SOX. Thomas Venables. in testimony on behalf of the ABA ( SEC 2007 ) before the Senate Committee on Small Business and Entrepreneurship. stated that because of the ?increasing cost of being a registered public company. a figure of little concerns. particularly some of our member community Bankss. have determined that deregistration is in the best involvements of their stockholders. ? RESEARCH DESIGN There are many surveies bespeaking that SOX has added a significant cost to U. S. concern. However. many of the benefits of the Acts increased internal controls. such as better determination devising and decreased potency for fraud. are hard to quantify. American Bankss that autumn under the authorizations of the Securities and Exchange Commission ( SEC ) are required to implement SOX. afterlife referred to as ?Registered Banks. ? . However. many American Bankss are in private owned and are non required to follow the demands of the SEC and SOX afterlife referred to as ?Nonregistered Banks. .

By comparing the operating consequences of these two categories of Bankss during the period that the Act has been in topographic point. a we may be able to measure the cost and benefits of SOX. Research suggests that there is no unconditioned operational efficiency based upon the mode in which a bank is owned: public or private. In their findings of the German banking industry Altunbas et Al. ( 2001 ) found that inefficiency steps indicate that economic systems of graduated table have more influence over the efficient operation of Bankss than does the type of ownership. In an effort to insulate the impact of SOX we use an experimental design with the Nonregistered Bankss moving as the control group and the Registered Bankss as the intervention group. The twelvemonth 2005 was selected as an effort to cut down the impact of the2008 fiscal crisis on the houses consequences. In 2005 the Registered Bankss will hold implemented SOX. hence received the intervention. while the Nonregistered Bankss will non hold been required to implement SOX and serve as a control group. This relationship is summarized in Table 1 below:

Table 1: Research Design Year Registered Bankss Nonregistered Banks 2000 Control Control 2005 Treatment – SOX applied Control – SOX Not required

There are many differences between the Registered and Nonregistered Bankss besides the execution of SOX. To minimise the impact of these single differences. we use informations from the twelvemonth 2000 which was selected because that is before SOX was implemented. Therefore. in 2000 neither the Registered Bankss nor Nonregistered Bankss will hold been impacted by SOX. For each single bank ( one ) . we take the return on assets ( ROA ) . and deduct the 2000 ROA for bank I from the 2005 ROA for bank I to give a alteration in ROAi: ?ROAi = ROAi. 2005 – ROAi. 2000 The same attack is used for Return on Equity ( ROE ) : ?ROEi = ROEi. 2005 – ROEi. 2000 By concentrating on the alteration in returns for each single bank. this should take many of the alone factors impacting single Bankss and aid to insulate the intervention consequence. If the costs and benefits of SOX are about equal so the mean ?ROA for the registered and nonregistered Bankss should be the same. If the benefits of SOX exceed the costs. so the average ?ROA of the Registered Bankss should be greater than the average ?ROA of the Nonregistered Bankss. If the costs of SOX exceed the benefits so he mean ?ROA of the Registered Bankss should be less than the average ?ROA of the Nonregistered Bankss: H01: HA1: The mean of the Registered Bankss ? ROA is equal to the mean of the Nonregistered Bankss ?ROA. The mean of the Registered Bankss ? ROA is non equal to the mean of the Nonregistered Bankss ?ROA.

We will besides prove the impact on ROE with the same outlooks as ROA: H02: HA2: The mean of the Registered Bankss ? ROE is equal to the mean of the Nonregistered Bankss ?ROE. The mean of the Registered Bankss ? ROE is non equal to the mean of the Nonregistered Bankss ?ROE.

DATA SELECTION AND DESCRIPTIVE STATISTICS In order to obtain the ROA and ROE informations necessary for proving the above hypotheses U. S. bank fiscal information was collected from Federal Reserve archives for the old ages 2000 through 2005. The information included entire assets. return on assets. return on equity and was segregated for ?Registered? V ?Nonregistered? Bankss. Exhibit 1 represents a sum-up of the mean and median of assets for Registered Banks and Nonregistered Banks. Although there are more Nonregistered Banks ( 878 to 1. 525 vs 582 to 806 ) the Registered Banks are larger in footings of assets due to the fact that they have more stockholders and therefore a larger capital base.