Sarbanes Oxley- Good or Bad? It Depends On Your Metric

Now we have a case of dueling studies regarding the effects of the notorious Sarbanes-Oxley Act of 2002.

Robert Grady, a partner who runs the venture capital arm at the Carlyle Group, wrote a long op-ed piece in last Thursday's Wall Street Journal on the evils of Sarbox. In his opinion, it has depressed the creation of small, high-potential, economically desirable smaller tech IPOs. Grady believes that, in a Sarbox world, companies like Intel, Cisco and E*Trade would not have been able to go public. The cost and effort required by Sarbox would have discouraged their IPOs, relegating them instead to being purchased by some larger companies, thus dampening their eventual entrepreneurial success.

On Friday, the Journal published an article about two university finance professors who insist that Sarbox hasn't hurt the US in terms of its pre-eminence as a financial hub. They cite price premiums of companies listed here and overseas, versus those dual-listed in london.

The two authors come to different conclusions because they are measuring different phenomena. However, I think Grady is right. The damage to the US economy results from the manner in which Sarbox strangles innovation and new-company formation. This has been the engine of innovation, growth and American economic leadership since the early days of the space race in the 1960s. Sarbanes-Oxley is threatening to destroy that leadership by hampering the creation of new, young, innovative companies due to its burdensome requirements.

The effect of Sarbox on existing, large-company listings is rather less important. They are not the main engines of continuing US global economic leadership.

Innovation is.