The Sarbanes-Oxley Act and Exit Strategies of Private Firms PDF

The Sarbanes-Oxley Act and Exit Strategies of Private Firms*
FRANCESCO BOVA, University of Toronto
MIGUEL MINUTTI-MEZA, University of Miami
GORDON RICHARDSON, University of Toronto
DUSHYANTKUMAR VYAS, University of Toronto
Public companies have been central to innovation and job creation. One reason why
entrepreneurs work so hard, and why venture capitalists place so many risky bets, is
because they hope to make a fortune by going public. IPOs provide young firms with
cash to hire new hands and disrupt established markets. The alternative is to sell them-
selves to established firms—hardly a recipe for creative destruction. Imagine if the fledg-
ling Apple and Google had been bought by IBM.
The Economist, May 19, 2012.1
1. Introduction
In early 2012, the U.S. Congress contemplated a regulatory change (Bill S1933) that
would make it easier for small firms to pursue an initial public offering (IPO). The change
would enable companies with less than $1 billion in annual revenue to comply with cer-
tain Sarbanes-Oxley Act (SOX) regulations after they had pursued an IPO. Mark Heesen,
president of the National Venture Capital Association surmised that, “If you give [compa-
nies] a better ability to go public, maybe some will take the public route as opposed to
getting acquired.” Heesen further stated, “Or maybe some will go public a little faster
than they were anticipating. That will spur job creation.”2 The provisions of Bill S1933
and the tenor of the debate surrounding its adoption imply that the costs of SOX have
impeded the ability of private firms to go public. As the citation above notes, there may
be real costs to society if private firms opt to be acquired rather than pursue an IPO.
Building on these points, we assess whether SOX has had an impact on both the exit
* 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 Statsâ 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 partici-
pants at the Rotman Accounting PhD Program 10th Anniversary Conference, the University of Queens-
land, 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 Econom-
ics 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.
1. http://www.economist.com/node/21555562, retrieved June 10, 2013.
2. http://www.forbes.com/sites/tomiogeron/2012/02/24/will-sarbanes-oxley-changes-help-ipo-market/, retrieved
June 10, 2013.
Contemporary Accounting Research Vol. 31 No. 3 (Fall 2014) pp. 818–850 © CAAA
doi:10.1111/1911-3846.12049
SOX and Private Firm Exit Strategies 819
strategy preferences of private firms and the deal proceeds achieved by private firms when
selling to a public buyer.
We first assess SOX’s impact on the decision of private firms either to be acquired by
a public firm or to pursue an IPO.3 We note that SOX’s implementation has forced pub-
licly traded firms to incur costly new layers of financial reporting controls to monitor
internal transactions. These costs have proven to be one of the more controversial ele-
ments of SOX’s implementation.4 As privately held firms need not apply SOX, a public
company’s acquisition of a private target should entail incurring new costs to bring the
private firm into compliance with SOX’s internal control requirements. However, we argue
that the costs of bringing a private acquisition target into SOX compliance should be miti-
gated somewhat, as public acquirers have presumably already established a SOX compli-
ance infrastructure. Thus, we argue that a public acquirer can utilize its existing SOX
infrastructure to avoid having to “reinvent the wheel” for its acquired target. Building on
this insight, we also argue that it should be relatively more expensive to bring an IPO firm
into SOX compliance, because IPO firms have to develop their SOX infrastructure from
scratch. To provide support for this claim, we assess a random sample of the S-1 filings of
several firms in our sample that choose to go public in the post-SOX era. In 85 percent of
the cases, the IPO firms discuss concerns over the substantial costs to becoming SOX com-
pliant, prior to going public. As the evidence suggests that there are larger SOX-related
costs for IPO firms, fewer firms should meet the threshold over which the benefits of going
public outweigh the benefits of being acquired, and as a result fewer U.S. private firms
should choose the U.S. IPO option as an exit strategy, post-SOX.
Following this assessment, we narrow our focus to analyze SOX’s impact on the
acquisition of private firms by public acquirers with a comparison of SOX’s impact on
deal multiples for private acquisition targets. As we suggest above, a public company’s
acquisition of a private target should still entail the buyer incurring new one-time and
recurring costs to bring the private firm into SOX compliance following its acquisition
(albeit smaller costs than if the private target chose to pursue an IPO). Furthermore, if
these additional costs are borne by the private target, it should receive lower deal multi-
ples in the post-SOX era, compared to a private target that is fully SOX compliant prior
to acquisition.5 We utilize two proxies for the target’s level of pre-acquisition SOX compli-
ance: firm size and auditor type. Additionally, we use two inverse proxies for the target’s
level of pre-acquisition SOX compliance: the speed at which the deal is completed and the
target’s predicted internal control weaknesses.
We establish two principal findings. First, SOX appears to have shifted U.S. private
companies’ exit strategy preferences from pursuing an IPO to being acquired by a public
firm. This shift in preferences is particularly prominent for smaller U.S. firms. To assess
the robustness of this result, we rerun our tests in a U.K. setting. As the United Kingdom
did not adopt concurrent SOX-like regulations with the United States, we expect SOX to
have had no impact on the likelihood of IPO for U.K. private firms. Consistent with this
3. Recognizing that there are exit strategy choices beyond these two options, in additional analyses we also
assess how the propensity for private U.S. firms to exit the private market has changed from the pre-SOX
era to the post-SOX era across five different exit strategies: domestic IPO, domestic public acquisition, for-
eign IPO, foreign acquisition, and private domestic acquisition.
4. A number of articles suggest that the implementation of SOX has led to net costs for some U.S. firms. See
for example Solomon (2005), Krishnan, Rama, and Zhang (2008), and Hansen, Pownall, and Wang (2009).
On the other hand, Ashbaugh-Skaife, Collins, and Kinney (2008) provide evidence that firms who report
higher internal control deficiencies also have weaker accrual quality. This result suggests a benefit to market
participants to having internal control deficiencies disclosed.
5. If the acquirer has greater negotiation leverage, then the costs of SOX should be imposed on the target.
Conversely, if the target has the negotiation leverage, the costs of SOX should be imposed on the acquirer.
CAR Vol. 31 No. 3 (Fall 2014)

820 Contemporary Accounting Research
expectation, we find no evidence that SOX affected U.K. private companies’ exit strategy
preferences. This result provides further support for our initial insights.
Second, we observe that private company deal multiples in the post-SOX era are
increasing in three of our four proxies for the target’s level of pre-acquisition SOX compli-
ance. For our remaining proxy, SIZE, we find that, relative to the pre-SOX period, the
post-SOX period association between deal multiples and firm size has increased. We attri-
bute this post-SOX increase to the extent of SOX compliance, given the mild assumption
that firm characteristics other than SOX compliance are stable across the pre- and post-
SOX periods. Conversely, we find no evidence that SOX had a similar impact on any of
our three control groups. Our results suggest that an indirect cost of SOX may be its
impact on the deal proceeds received by the owners of private firms selling out. We esti-
mate that, for a median-sized firm, the cost to being not SOX compliant prior to acquisi-
tion ranges from $1.07 million to $2.39 million.6 Krishnan, Rama, and Zhang (2008)
document that, for the smallest quartile of public companies in their sample (with mean
sales of $61.7 million), the mean total SOX 404 costs are $1.04 million. Thus, our range
for deal discounts related to being not SOX compliant is reasonable given that there may
be other, non-404 costs related to SOX’s adoption not tabulated by Krishnan et al.
(2008). Effects of this order of magnitude could cause a private company to forgo growth
opportunities and stay private, should it find the alternative exit strategies discussed above
to be unattractive. A note of caution is in order, however, since we do not demonstrate an
increased propensity for private firms to stay private.
While there are ex ante societal benefits to SOX-type reforms, in terms of reduced
fraud, better financial reporting, and the resulting reduction of negative externalities, the
regulator must consider the total societal costs of SOX-type reforms, including real costs
to society resulting from smaller private firms opting to be acquired rather than going
public. We leave a consideration of the costs and benefits of SOX-type regulations up to
the global regulatory community, with the hope that the stylized facts presented in this
study inform the ongoing debate about the socially optimal level of mandatory investment
in internal and external monitoring.
The paper proceeds as follows: section 2 provides a literature review, section 3 devel-
ops the hypotheses, section 4 describes the sample, section 5 discusses the tests, section 6
presents the descriptive statistics and results, section 7 presents additional analyses, and
section 8 concludes.
2. Literature review
The compliance costs of SOX and related changes in U.S. stock exchange requirements
are discussed extensively in Chhaochharia and Grinstein (2007) and Piotroski and Sriniva-
san (2008). Such costs include the costs related to Chief Executive Officer (CEO) and Chief
Financial Officer (CFO) certification, the internal control disclosure requirements under
Section 404, and the governance costs associated with independence requirements for audit
committees and boards of directors. Holmstrom and Kaplan (2003) argue that such com-
pliance costs are onerous for small firms, echoing sentiments expressed in the Advisory
Committee on Smaller Public Companies (2006). The costs of compliance with Section
404 alone include costs related to increased staffing in the accounting area, external con-
sulting and technology expenses, and additional audit fees for firms over a certain size.
Furthermore, Krishnan et al. (2008) report that while larger firms have larger Section 404
costs, they also have lower costs per dollar of assets, implying that small firms are dispro-
portionately affected by Section 404.
6. We describe the procedure for calculating the discount in deal proceeds at the end of Section 6.

The benefits of SOX at a societal level include lower negative externalities associated
with reduced corporate misconduct. These benefits are discussed extensively in Piotroski
and Srinivasan (2008). The issue then becomes whether SOX has resulted in a net benefit
for society. In an insightful discussion of the literature exploring net benefits, Karolyi
(2009) identifies two types of studies: studies exploring the impact of SOX on shareholder
wealth and studies exploring the impact of SOX on firm decisions to go private, go
“dark,” or list on U.S. versus foreign exchanges. Our study straddles both strands of the
literature.
Our first research question addresses the impact of SOX on the exit strategies of pri-
vate firms deciding between an IPO and selling to a public company. In assessing this
question, we address methodological concerns brought up by Karolyi (2009). Specifically,
Karolyi (2009, 589) discusses the benchmark dilemma facing studies exploring the impact
of SOX on firm decisions. This dilemma states that, absent a control group of U.S. firms
which are both contemplating going public and not subject to SOX, it is difficult to attri-
bute economic effects to SOX per se. We recognize the benchmarking challenge facing our
first research question. Specifically, our results can only be attributed to SOX if all other
factors pre- and post-SOX are correctly controlled for in a multivariate exit strategy
model. We address this design limitation in two ways. First, we test whether the sales
threshold over which a firm chooses the IPO option increases after SOX. This is an impli-
cit benchmark design, in that we compare how SOX has affected the exit strategy of larger
versus smaller private firms, based on the mild assumption of SOX cost scale economies
supported by the evidence of Krishnan et al. (2008) discussed above. Second, we rerun
our IPO decision tests in a U.K. setting. We argue that the United Kingdom should pro-
vide for a good benchmark setting, as it did not enact SOX-like regulations concurrently
with the United States.
As a triangulating check on whether SOX potentially affects firm exit strategies, we
turn to our second research question, which follows in the tradition of what Karolyi
(2009) terms “price-effect” studies. Our review of the mergers and acquisitions (M&A)
practitioner literature reveals assertions that the public company buyer will offer lower
deal proceeds (manifested, for example, in a lower enterprise value [EV]/Sales multiple) if
the private target is not completely SOX compliant. The source of this penalty is higher
due diligence costs and greater internal control investments on the part of the acquirer.
This suggests that, if the researcher can measure the degree of pre-acquisition SOX com-
pliance, one should be able to demonstrate reduced proceeds for private sellers that have
not made SOX-related investments. This conjecture is supported in Peters, Koh, and Be-
lisle (2005), which states, “In the M&A area, SOX compliance must be addressed as part
of the transaction when there is a publicly traded acquirer and a privately owned target.
Because SOX compliance is costly and time consuming, a public buyer is likely to place a
lower value on a privately owned candidate if significant time and expense will be needed
to bring the target up to standards.”
In a survey of 341 private clients (ranging in sales from $5 to $150 million) Pricewa-
terhouseCoopers (2005) indicates that private companies adopting SOX initiatives (with
average sales of $46 million) tend to be larger in terms of sales compared to clients that
are not involved in SOX initiatives, with this partition having average sales of $29 million.
This points to variation in SOX compliance among private companies, related to firm size.
Also, according to the survey, only one-third of surveyed private PwC clients had dedi-
cated significant resources toward SOX compliance. The remaining two thirds had at the
time of the survey invested only a limited amount. Such survey results, to the extent that
they extrapolate to private firms being acquired, point to potentially important variation
among private acquisition targets regarding their degree of pre-acquisition SOX compli-
ance, and a size dimension to this variation—a possibility which we test for.

3. Hypothesis development
We first examine the role of SOX in determining private company exit strategy prefer-
ences. To start, we assume that managers of private firms that seek to enter the public
market have two possible exit strategies to choose from: an IPO or acquisition by a public
firm.7 As we note from the prior literature, the implementation of SOX has forced publicly
traded firms to incorporate a costly new layer of regulatory control in order for auditors
to monitor internal transactions more thoroughly. Of particular interest in the SOX legis-
lation is Section 404—a mandate that requires auditors to report on internal controls over
financial reporting. As privately held firms need not comply with SOX, a public com-
pany’s acquisition of a private target should entail incurring new one-time and recurring
costs to bring the private firm into compliance with SOX’s internal control requirements.
However, these costs should be tempered by the fact that the target’s public acquirer can
leverage its existing SOX infrastructure to mitigate implementation costs. Conversely,
building on our previous arguments, we posit that IPO firms should face higher costs to
becoming SOX compliant. We suggest that because of this difference in SOX costs, firms
should be less likely to choose the IPO exit strategy following the adoption of SOX, all
else equal.8
This leads us to the following hypothesis relating to predicted differences between the
pre- and post-SOX period:
HYPOTHESIS 1. Private firms have an increased propensity to choose being acquired by a

public firm as an exit strategy relative to going public in the post-SOX period.
Continuing to focus on the distribution of private company exit strategies, we addi-

tionally conjecture that the firm size over which a private firm will be willing to pursue the
IPO option has increased post-SOX. This is based on the mild assumption of scale econo-
mies in SOX compliance costs. For example, we note that smaller firms have the option to
pursue an IPO via indices like the NASDAQ which offers market listing access for very
small firms. We argue that, in the post-SOX era, the costs to SOX may have been signifi-
cant enough to impede small firms from pursuing the IPO option.
Conversely, the costs to SOX compliance should not have impeded any of the largest
private firms in our sample from choosing the IPO option. For example, the decision to
exit the private market via an IPO for firms like LinkedIn Corp. should not have changed
due to the costs of SOX (which are relatively small for firms that are this large). Thus, we
expect the largest firms in our sample to choose the IPO option in both the pre- and post-
SOX setting.
Taken together, we posit that the level of firm sales above which there is a net benefit
for a private firm to pursue an IPO and under which a private firm will prefer to be
acquired should have increased following SOX’s implementation. This leads to our second
hypothesis:
7. Several papers have assessed a private firm’s decision to go public via an IPO or through acquisition by a
public company such as Pagano and Panetta (1998), Chemmanur and Fulghieri (1999), Lowry (2003), and
Poulsen and Stegemoller (2008). This research is part of a broader literature that assesses the costs and ben-
efits to going public as highlighted in Ritter (1987), Beatty (1989), Willenborg (1999), and Kim and Ritter
(1999). Studies that empirically analyze the choice of IPO versus takeover by a public firm include Brau,
Francis, and Kohers (2003) and Bayar and Chemmanur (2011). To the best of our knowledge, ours will be
the first to assess how the costs of SOX have shaped firms’ decision on which exit option to pursue, with
the exception of Bayar and Chemmanur (2011), which includes SOX as a control variable. However, unlike
this study, SOX is not the focus of Bayar and Chemmanur (2011).
8. In an earlier draft, we had derived our predictions analytically. Results are available from the authors upon
request.

HYPOTHESIS 2. Post-SOX, the firm sales threshold over which private firms will pursue
an IPO as an exit strategy has increased, relative to the pre-SOX period.
Finally, we turn our attention to assessing the effect of SOX costs on private company
deal multiples. Following our arguments in Section 2, in the post-SOX period, we expect
private target deal multiples to vary positively with the level of the target’s pre-acquisition
SOX compliance.9 This leads to our final hypothesis, which relates to cross-sectional con-
trasts in the post-SOX period for private targets:
HYPOTHESIS 3. Post-SOX, deal multiples for private targets will be higher for firms with
higher levels of pre-acquisition SOX compliance.
4. Sample
Propensity to choose an IPO versus takeover, U.S. and U.K. samples
To begin our analyses of private firms’ propensity to choose an IPO, we first assess a sam-
ple of U.S. IPO and takeover firms, followed by a similar assessment of U.K. IPO and
takeover firms. As the United Kingdom did not adopt SOX-type reforms concurrent with
the United States, using a benchmark sample of U.K. firms helps to separate the effects of
SOX from other temporal trends and macroeconomic effects. Moreover, the United King-
dom has been previously used as a benchmark sample in the SOX literature (e.g., Leuz
2007; Bargeron, Lehn, and Zutter 2010; Dey 2010).
The U.S. IPO firms include all observations from the SDC IPO database for the per-
iod 1994–2009. We excluded foreign IPOs, financial firms, and firms without the necessary
data to calculate our control variables. The U.S. IPO sample consists of 2,735 observa-
tions. The U.S. takeover firms include all U.S. private targets acquired by U.S. public
firms from the Pratt’s Statsâ database from Business Valuation Resources (BVR) for the
period 1994–2009. In addition, we complement the Pratt’s Statsâ data with data obtained
through an extensive manual search of the Securities and Exchange Commission (SEC) fil-
ings for each takeover deal in the EDGAR database.10 We excluded deals with a non-U.S.
target or acquirer, deals where less than 100 percent of the shares or assets were acquired,
targets in the financial industry (Standard Industrial Classification [SIC] codes 6000–6999),
targets with negative book value of equity, targets with negative sales, targets without the
necessary data to calculate our control variables, and extreme observations in the top and
bottom one percent of the SALES/EV multiple. The U.S. takeover sample consists of
1,003 observations from 1994–2009. Of the 1,003 private targets, 693 represent the acquisi-
tion of shares and 310 represent the acquisition of assets.11 Finally, we use data from
COMPUSTAT and the Center for Research and Public Securities (CRSP) to calculate the
industry-related factors in our model for the IPO and takeover firms. In order to keep the
9. DiGabriele (2008) finds evidence in the post-SOX era that the private company discount has increased.
However, the paper does not explore variation in the level of pre-acquisition SOX compliance as a predictor
of deal proceeds in either the pre- or post-SOX period.
10. Pratt’s Statsâ has a much larger coverage of financial statement and acquisition-related data than SDC for
private takeovers over our time period. More importantly, for the purpose of our study, Pratt’s Statsâ pro-
vides SEC filings in which public firms acquiring private firms disclose transaction information. This feature
allows us to construct numerous proxies and controls from the Pratt’s Statsâ database. In contrast, vari-
ables like research and development (R&D), lag sales (necessary to compute GROWTH), and auditor type
are scarcely populated in SDC. Finally, we also compared the descriptive statistics for our main variables
across Pratt’s Statsâ and SDC. Importantly, the descriptive statistics indicate that, in general, there are no
statistically significant differences in the datasets for variables such as SIZE, DEAL TIME and SALES/EV
multiples.
11. In untabulated analysis, we find that our results are robust to the exclusion of asset deals.

takeover samples constant across our analyses, if any of the control variables required for
the IPO analyses were missing, the missing values were set to the median values for the
whole sample.12 The combination of U.S. IPO and takeover firms results in a sample of
3,738 observations.
The U.K. IPO firms include all U.K. observations from the SDC IPO database for
the period 1994–2009 with similar restrictions as the U.S. IPO firms. The U.K. IPO sam-
ple consists of 1,266 observations. The U.K. takeover firms include all observations from
the SDC Mergers and Acquisitions database with similar restrictions as the U.S. takeover
firms. We use SDC because Pratt’s Statsâ does not have comprehensive data on non-U.S.
takeovers. The U.K. takeover sample consists of 249 observations and none of these
observations is cross-listed in the United States. The combination of U.K. IPO and take-
over firms results in a sample of 1,515 observations, and our combined U.S. and U.K.
sample consists of 5,253 observations.
Acquisition deal multiple tests

The primary sample of interest in our takeover analyses of deal multiples consists of 1,003
U.S. private targets acquired by U.S. public firms. This sample is identical to the sample
of U.S. private targets used in the IPO analyses discussed in section 4. In addition, we
employ a number of benchmark samples to isolate the effect of SOX from other time
trends and confounding events.
The first benchmark sample consists of 249 U.K. private targets acquired by U.K.
public firms. This sample is identical to the one used for the U.K. IPO choice test dis-
cussed in section 4. As noted above, U.K. firms are not subject to SOX and have been
previously used in the SOX literature as a reasonable benchmark for U.S. firms. However,
regulatory filings for takeovers in the United Kingdom are different from those in the
United States which leads to less data availability. As a result, we run the U.K. tests using
fewer proxies for pre-acquisition SOX compliance and fewer control variables.
The second benchmark sample consists of 1,140 U.S. private targets acquired by U.S.
private firms during the period 1994–2009. This sample was obtained from the Pratt’s
Statsâ database with similar restrictions as our primary takeover sample. On the one
hand, these deals constitute a good benchmark because they involve U.S. firms that are
subject to similar economic conditions as our primary sample, but are not subject to SOX.
On the other hand, data on these deals are generally scarce as both the acquirer and the
target are private companies. As a result, although there are a large number of observa-
tions, we only have enough data to utilize one measure of pre-acquisition SOX compliance
for this benchmark sample in the interest of minimizing data attrition.
The third benchmark sample consists of 1,050 U.S. public targets acquired by U.S.
public firms during the period 1994–2009. This sample is obtained from the SDC Merg-
ers and Acquisitions database with similar restrictions as our primary sample. In addi-
tion, we use COMPUSTAT and Audit Analytics to complement the data in SDC. These
deals constitute perhaps the least comparable group to our main sample of interest, given
the size difference between private and public targets;13 however, we can obtain the same
variables, and hence, estimate the same models as in our primary sample of interest. We
argue that acquisition-related SOX costs should be smaller when public buyers acquire
public targets, because public targets should have already incurred the initial costs
required to develop SOX-related infrastructure. Thus, a portion of a public target’s cost
to becoming SOX compliant should be sunk at the time of its acquisition. This should
12. We note that our results are not sensitive to this method of variable measurement.
13. We obtain similar inferences in a matched sample, based on size and year, of public–private and public–
public deals.

lead to SOX costs having a more limited impact on both the acquirer’s expected future
cash flows and the public target’s acquisition multiple relative to that of a private tar-
get.14
5. Empirical model
To test the likelihood of U.S. private firms choosing an IPO over being acquired, we con-
struct an IPO vs. acquisition model combining insights from Brau et al. (2003) and Bayar
and Chemmanur (2011), along with the inclusion of our variables of interest. The main
empirical model is a pooled logistic regression as follows:
X
pi
ln ¼ ai þ b1 SOXi þ b2 SIZEi þ bi industry-related factors
1 pi
X X
þ bi market-timing factors þ bi deal-related factors
X
þ bi demand for fund factors þ RF þ ei ; ð1Þ
where p represents the likelihood that firm i chooses an IPO. For ease of exposition, we set
the binary dependent variable equal to 1 if firm i chooses an IPO and 0 if firm i chooses to
be acquired. SOX is an indicator variable equal to 1 for years after 2003. SIZE is the natural
logarithm of sales for the private firm. SIZE_LARGE (SIZE_SMALL) is an indicator equal
to 1 if firm size is equal to or greater than (less than) the median-sized firm in the sample. In
an alternate specification of (1), we replace the SOX indicator variable with SOX * SIZE_
LARGE and SOX * SIZE_SMALL—interaction terms that capture the impact of SOX on
the likelihood of choosing an IPO for larger and smaller firms, respectively. Following
directly from our development of Hypothesis 1 and Hypothesis 2, we run three sets of tests
on two different samples using different specifications of (1). We run the first test on the
U.S. private sample and incorporate only the SOX indicator as our variable of interest. We
conjecture that SOX costs are higher for IPOs than for acquisitions, and in turn we expect
to observe fewer IPOs post-SOX. Thus, we expect the coefficient on b1 to be negative. Ritter
(1987), Holmstrom and Tirole (1993), and Pagano and Roell (1998) argue that IPOs involve
high explicit fixed costs. Thus, for relatively small private firms, conducting an IPO can be
quite costly, and the potential for success as an independent public company may be limited.
For our second and third tests, we omit the SOX indicator as a stand-alone variable and
estimate the coefficients on SOX * SIZE_LARGE and SOX * SIZE_SMALL to assess the
impact of SOX on smaller firms vis- a-vis their larger counterparts.15 Because we assume that
SOX compliance costs prior to pursuing an IPO are higher than the SOX costs of being
acquired, we predict that the size threshold over which a firm will choose the IPO option will
increase post-SOX. Thus, we expect to observe a significant negative coefficient on the
SOX * SIZE_SMALL interaction term and that the coefficient will be significantly more
negative than the coefficient on SOX * SIZE_LARGE.
Next, we conduct identical tests as specified above on a U.K. control group. Ceteris
paribus, because the United Kingdom did not impose concurrent SOX-like regulations on
public companies, we would expect that the introduction of SOX should not have
14. To provide support for this claim, we conduct tests on public targets acquired by public firms to see if
there is any impact on deal multiples for those targets that report internal control weaknesses (ICWs) prior
to acquisition. Our results reveal that having an ICW does not lower the deal multiples paid for public tar-
gets. One explanation is that public firms with ICWs are generally SOX compliant except for a few identi-
fied deficiencies and that these identified deficiencies have a relatively small impact on the valuation of
public targets or are already incorporated in the stock price.
15. We thank an anonymous reviewer for this model specification. The model specification is similar to one
found in Bargeron, Lehn, and Zutter (2010).

impacted U.K. private firms’ decisions to choose either the U.K. IPO or public acquisition
option. Finally, we employ a difference-in-difference design whereby we pool the U.K. and
U.S. private targets and rerun the model with additional interaction terms that incorporate
indicator variables for U.S. firms and U.K. firms. Our expectation is that U.S. private
firms will have an increased propensity to choose being acquired by a public firm vis-a-vis
their peers from the United Kingdom in the post-SOX period.
In all specifications of (1), we also include a vector of controls that affect a private
firm’s likelihood of choosing an IPO. Following Brau et al. (2003) and Bayar and Chem-
manur (2011), we incorporate factors that have been shown to affect a private firm’s
choice between IPO and acquisition. We incorporate the following industry-related factors:
HHI, the Herfindahl index for the firm’s industry; PB, a dummy variable that equals 1 if
a private firm’s industry is among the top five CEO perk consumption industries listed in
Rajan and Wulf (2006) and the CEO-Divisional Manager differential in the Rajan-Wulf
perk consumption score is greater than 1; IND_DA, the average debt-to-assets ratio for
the firm’s industry; IND_TAN, the average tangible asset to total asset ratio for the firm’s
industry; IND_MTB, the average market-to-book ratio for the firm’s industry; HITECH,
an indicator variable that equals 1 if the firm is in the high-tech industry; and IND_FER-
ROR, the industry mean (two-digit SIC grouping) of average analyst forecast error in the
prior year. We incorporate proxies for hot IPO markets, MRKTRF (the equity risk pre-
mium). Additionally, we incorporate demand-for-fund factors (i.e., the private firms’ need
for funds), HML, and SMB, and the 3-month T-bill rate, RF, where a higher cost of debt
makes IPOs more attractive because acquisitions are often funded with debt. Finally, we
incorporate a deal-related factor, LIQUIDITY, measured as the percentage of shares
offered in cash for private acquisition targets and the ratio of secondary shares offered to
total shares for IPO firms. According to Brau et al., if the seller wants to cash out, greater
liquidity is provided by an acquisition than an IPO.
Turning to our tests of the impact of SOX on target deal multiples, we use the follow-
ing two models:
SALES=EV ¼ a0 þ b1 COMPi þ b2 SIZEi þ b3 GROWTH þ b4 MARGIN

þ b5 R&D þ b6 LEVERAGE þ b7 WORKING CAP þ ei : ð2Þ
SALES=EV ¼ a0 þ b1 SOX COMP HIGHi þ b2 SOX COMP LOWi
þ b3 SIZEi þ b4 GROWTH þ b5 MARGIN þ b6 R&D
þ b7 LEVERAGE þ b8 WORKING CAP þ ei : ð3Þ
SALES/EV is the inverse sales multiple calculated as the target’s total sales divided by
enterprise value.16 We use the inverse multiple in order to mitigate scaling concerns when
firms have comparatively low sales relative to enterprise value. Enterprise value equals the
sale price of a firm’s equity plus total liabilities less current liabilities. SOX is an indicator
variable equal to 1 for years after 2003. Our variable of interest in (2) is COMP—one of
four measures that proxy for a target’s level of pre-acquisition SOX compliance. For each
COMP variable we run three models: A model each for the pre-SOX period and the post-
SOX period that focuses on b1 in (2); and a model pooling both pre-SOX and post-SOX
observations that focuses on b1 and b2 in (3), where COMP_HIGH (COMP_LOW)
denote higher and lower values for our SOX compliance proxies, respectively. We define
16. In untabulated analysis, we note that our results are robust to the use of earnings before interest and taxes
(EBIT)/EV as a dependent variable.

each of the COMP variables as well as each COMP_HIGH and COMP_LOW partition
below.
Our first proxy for a target’s level of pre-acquisition SOX compliance is the target
firm’s size. SIZE is measured as the natural logarithm of sales for firm i in the most recent
fiscal year. To motivate the use of SIZE as a proxy for a target’s pre-acquisition level of
SOX compliance we first link back to our arguments for Hypothesis 1 and Hypothesis 2
which suggest that SOX costs are scale dependent. We augment our theoretical arguments
with evidence from Audit Analytics (2009), which tracks material weaknesses for both
nonaccelerated filers (defined as a firm where the public float is under $75 million on the
last day of the firm’s second fiscal quarter—i.e., small firms) who had to provide manage-
ment certifications under SOX 404 for year ends and quarters after December 15, 2007,
and accelerated filers, who had to provide both management certifications and audit opin-
ions for these disclosures. For 2007, 7.9 percent of accelerated filers reported some internal
control weaknesses, compared to 30.7 percent of nonaccelerated filers. As nonaccelerated
filers are smaller firms, the evidence suggests that smaller firms have weaker internal con-
trols than their larger counterparts. Extrapolating this result to the private setting, we
expect that smaller private targets will have lower pre-acquisition SOX compliance than
their larger counterparts, all else equal. For inverse deal multiples, we expect the coeffi-
cient on SIZE to be negative for the private sample in the post-SOX era. When we run
the pooled model in (3) incorporating both the pre-SOX and post-SOX observations,
LARGE (SMALL) is an indicator variable that equals 1 for all firms that are at or above
(below) the median size in the pooled sample. Given our expectation that larger firms are
more SOX compliant and should achieve lower inverse deal multiples, we expect a signifi-
cant negative coefficient on SOX * LARGE in the pooled model.
Our second proxy for a target’s level of pre-acquisition SOX compliance is BIG4, an
indicator variable that equals 1 if the firm is audited by a Big 4 accounting firm and 0
otherwise. Audit Analytics (2009) illustrates that accelerated filers receiving auditor attes-
tation have different likelihoods of receiving an adverse 404 opinion, depending on the
type of auditor. The evidence shows that clients of regional and local CPA firms have a
48.4 percent adverse opinion proportion, compared to 3.8, 5.9, 7.4, and 8.3 percent pro-
portions for clients of Ernst & Young, PricewaterhouseCoopers, KPMG, and Deloitte,
respectively. Thus, acquisition targets audited by Big 4 firms appear to have better internal
controls than firms audited by non-Big 4 firms. Additionally, results in DeFond and Len-
nox (2011) imply that in the post-SOX era, Big 4 auditors provide higher quality audits.
Extrapolating these results to the private setting, we expect that private targets with Big 4
auditors will have a higher level of pre-acquisition SOX compliance than those private tar-
gets with non-Big 4 auditors, all else equal. Thus, for inverse deal multiples, we expect the
coefficient on BIG4 to be negative, in the post-SOX era. When we run the pooled model
in (3) incorporating both the pre-SOX and post-SOX observations, BIG4 (NONBIG4) is
an indicator variable equal to 1 for firms that have a Big 4 (non-Big 4) auditor in the
pooled sample. Given our expectation that firms with a Big 4 auditor are more SOX com-
pliant and should achieve lower inverse deal multiples, we expect a significant negative
coefficient on SOX * BIG4 in the pooled model.
Our third proxy for a target’s level of pre-acquisition SOX compliance is DEAL
TIME, a variable that reflects the time it takes to complete the acquisition due-diligence
process. Due to data limitations, we measure deal time differently for private and public
targets. For private targets, we measure deal time as the natural logarithm of the number
of days between the filing of the 8-K and the 8-K/A by the public acquirer. When a public
company acquires a private target, the main (and often only) source of information is the
SEC filings. When a private target is acquired, there is a time gap between (a) the
announcement of the acquisition (sometimes as a done deal and sometimes as a likely

event) in a form 8-K and (b) the subsequent disclosure of the audited financial statements
of the acquired target to the buyer’s shareholders in a form 8-K/A.17 We suggest that the
time gap between the 8-K and the 8-K/A is directly related to the due diligence required
for the buyer to audit the target’s financial statements and controls. For public targets, we
measure deal time as the natural logarithm of the number of days between the acquisition
announcement and effective dates reported by SDC Platinum. When a public company
acquires a public target, the financial statements of the target are already audited and
known to the public (as the target is publicly traded), thus precluding the need for 8-Ks
and 8-K/As. The proxy we use for M&A due diligence time for public targets is the time
between the official public announcement (captured from press releases, SEC documents,
or other sources) and the effective date of the deal.
Brantley (2005) suggests that in the post-SOX environment, public company acquirers
of private companies are focusing additional diligence efforts on ensuring that the financial
statements of the seller fairly present its financial condition, reviewing seller’s significant
accounting policies and use of any off-balance sheet financing structures, and assessing
seller’s existing disclosure controls and internal controls over financial reporting to deter-
mine what changes will need to be made to integrate them into the buyer’s controls and
procedures. These are just some of the ways that buyers have expanded M&A due dili-
gence efforts in response to the SOX requirements. These results suggest that in a private
target setting, those targets with lower pre-acquisition SOX compliance should require the
buyer to spend more time on due diligence. Thus, we expect that, when assessing inverse
deal multiples, the coefficient on DEAL TIME will be positive for the private sample in
the post-SOX era. Finally, we note that due to data availability issues for both the private
and public deal time construct, the sample size for the analysis is strictly smaller when
assessing DEAL TIME as a proxy for pre-acquisition SOX compliance. When we run the
pooled model in (3) incorporating both the pre-SOX and post-SOX observations, LONG
(SHORT) is an indicator variable that equals 1 if the firm’s deal time is at or longer
(shorter) than the median deal time. Given our expectation that firms with shorter deal
times should be more SOX compliant and should achieve lower inverse deal multiples, we
expect a significant negative coefficient on SOX * SHORT in the pooled model.
Finally, in addition to using single-variable proxies for the level of SOX compliance,
we also employ an imputed measure based on the characteristics of public firms that expe-
rienced internal control weaknesses (ICW). We assume that the firm characteristics that
lead to ICWs in a public setting will also lead to ICWs in a private setting. Following a
modified version of the logistic regression approach used in Ashbaugh-Skaife et al. (2007),
we create a prediction model using all observations with 302 or 404 material weakness
data in Audit Analytics since the beginning of the SOX certification until 2010, to generate
coefficients for the determinants of the probability of ICW. We estimate the following
equation modeling the probability of ICW:
ICWi;t ¼ 2:8634 0:030 SIZEi;t 0:0001 MARGINi;t 0:0001 SALES GRi;t

þ 0:0004 LEVi;t 0:1010 BIG4i;t : ð4Þ
17. For example, the following is a typical 8-K/A opening statement that describes Franklin Electric Com-
pany’s acquisition of the private firm, Little Giant Pump Company: “Little Giant Pump Company (the
‘Company’), a wholly-owned subsidiary of Tecumseh Products Company (the ‘Parent’) and a leading
worldwide provider of commercial and consumer water transfer solutions, was acquired by Franklin Elec-
tric Co., Inc. on April 21, 2006, as indicated in the initial form 8-K dated April 21, 2006. In response to
Item 9.01 of such Form 8-K, Franklin Electric stated that it would file certain financial information in a
subsequent 8-K/A. This amendment provides audited financial information containing the financial posi-
tion, results of operations and cash flows, as of, and for the year ended December 31, 2005.”

Based on the coefficient estimates above, we compute the imputed probability of ICW
for our sample of private and public acquisition targets by fitting the above coefficients to
our sample firms (PRED_ICWi,t). We note that SIZE and BIG4 are significant at the 1
percent level and the pseudo-R2 of the model is 0.34 percent. The significance levels on the
coefficients provide further justification for using SIZE and BIG4 as conditioning variables
in our original models.
We expect lower deal multiples, post-SOX, for private acquisitions that have higher
PRED_ICW scores, as a higher likelihood of an internal control weakness is an inverse
proxy for the level of the target’s pre-acquisition SOX compliance. Thus, for inverse deal
multiples, we expect the coefficient on PRED_ICW to be positive for the private sample in
the post-SOX era. When we run the pooled model in (3) incorporating both the pre-SOX
and post-SOX observations, LARGEP (SMALLP) is an indicator variable equal to 1 if
the firm’s predicted ICW is at or above (less than) the median predicted ICW in the
pooled sample. Given our expectation that firms with lower predicted ICW are more SOX
compliant and should achieve lower inverse deal multiples, we expect a significant negative
coefficient on SOX * SMALLP in the pooled model.
Finally, for our primary sample and all of our control samples provided the data is
available, we include a number of controls used commonly in the M&A deal multiples lit-
erature. Specifically, we expect inverse deal multiples to be decreasing in GROWTH—the
one-year sales growth of the target, RD—the firm’s research and development expendi-
tures divided by total assets, MARGIN—the operating margin calculated as sales minus
cost of goods sold, scaled by sales, LEVERAGE—long-term liabilities divided by total
assets, and WORKING_CAP—current assets less current liabilities divided by total
assets.18
6. Empirical results
Descriptive statistics
In Table 1, panels A and B, we present the descriptive statistics for the U.S. and U.K.
IPO sample, respectively, partitioned by the pre-SOX and post-SOX period. As indicated
in panel A, the average sales of U.S. firms choosing an IPO increased to $460 million in
the post-SOX period from $218 million in the pre-SOX period. After taking a log trans-
formation of sales, a t-test indicates that this difference in SIZE is statistically significant
(p-value < 0.01). This univariate evidence is consistent with SOX imposing larger relative
costs on smaller companies that seek to gain access to public markets. Turning to panel
B, there is no statistical difference in the means of SIZE for the U.K. IPO sample (p-value
= 0.400) across the pre- and post-SOX partition. This univariate evidence is plausible
because SOX was not adopted concurrently in the United Kingdom.19
In Table 1, panels C and D, we present descriptive statistics for the U.S. and U.K.
private targets acquired by public firms, partitioned by the pre-SOX and post-SOX period.
The mean sales in millions (SALES_$MILL) for U.S. takeover firms in the pre-SOX per-
iod is $47 million and in the post-SOX period is $79 million. The mean enterprise value
(TOTAL EV) for U.S. takeover firms also increased from $54 million in the pre-SOX
18. We include LEVERAGE as a proxy for enhanced information reliability due to creditor monitoring, fol-
lowing De Franco, Gavious, Jin, and Richardson (2011). To the extent that seller information quality
affects deal proceeds through cost of capital effects, this variable must be controlled for. Additionally, we
include WORKING_CAP as a proxy for negotiation leverage. If the acquirer has the negotiation leverage,
then the costs of SOX should be imposed on the target. Conversely, if the target has the negotiation lever-
age, the costs of SOX should be imposed on the acquirer. We note that the literature (e.g., Officer 2007)
utilizes the target’s liquidity as a proxy for its negotiation leverage.
19. We note that our inferences with respect to firm size in the pre- and post-SOX period are robust to infla-
tion adjustments for both the U.S. and U.K. samples.

TABLE 1
Descriptive statistics
Panel A: U.S. IPO sample
IPO firms, pre-SOX sample IPO firms, post-SOX sample
Variable N Mean Median S.D. N Mean Median S.D.
SIZE 2,328 17.19 17.20 2.15 407 18.61 18.73 1.92

SALES_$MILL 2,328 218.77 29.65 670.51 407 460.60 136.20 892.54
PROCEEDS 2,328 54.76 31.50 78.91 407 206.80 107.90 801.88
LIQUIDITY 2,328 0.10 0.00 0.20 407 0.17 0.00 0.28
HHI 2,328 0.08 0.06 0.08 407 0.06 0.04 0.05
PB 2,328 0.08 0.00 0.27 407 0.15 0.00 0.35
IND_DA 2,328 0.28 0.17 1.63 407 0.26 0.22 0.22
IND_TAN 2,328 0.24 0.19 0.14 407 0.22 0.15 0.19
IND_MTB 2,328 5.34 3.42 8.21 407 3.75 3.33 9.86
HITECH 2,328 0.36 0.00 0.48 407 0.29 0.00 0.46
IND_FERROR 2,328 0.49 0.01 5.01 407 0.05 0.04 0.31
MKTRF 2,328 4.33 3.47 6.80 407 3.18 3.28 6.09
HML 2,328 1.19 0.14 9.39 407 0.10 1.93 4.60
SMB 2,328 0.35 0.23 5.16 407 0.86 1.08 3.06
RF 2,328 0.40 0.43 0.09 407 0.19 0.16 0.15
Panel B: U.K. IPO sample
IPO firms, pre-SOX sample IPO firms, post-SOX sample
SIZE 953 1.00 1.00 0.00 313 1.00 1.00 0.00

SALES_$MILL 953 16.73 16.65 2.50 313 16.77 16.90 2.19
PROCEEDS 953 238.81 17.00 681.60 313 132.67 21.80 363.16
LIQUIDITY 953 76.94 14.10 287.61 313 67.45 12.90 188.43
HHI 953 0.09 0.00 0.23 313 0.14 0.00 0.29
PB 953 0.07 0.06 0.08 313 0.06 0.04 0.05
IND_DA 953 0.09 0.00 0.28 313 0.13 0.00 0.33
IND_TAN 953 0.40 0.24 0.79 313 0.30 0.24 0.55
IND_MTB 953 0.23 0.16 0.16 313 0.23 0.15 0.18
HITECH 953 10.33 3.43 88.20 313 3.66 3.60 9.12
IND_FERROR 953 0.24 0.00 0.43 313 0.20 0.00 0.40
MKTRF 953 0.77 0.02 5.64 313 0.03 0.05 0.66
HML 953 0.84 0.77 6.99 313 2.66 1.87 2.52
SMB 953 2.39 0.89 11.90 313 1.40 0.40 3.17
RF 953 1.10 0.38 6.48 313 1.03 0.80 2.65
Panel C: U.S. takeover sample, public acquisition of private targets
Takeover firms, pre-SOX sample Takeover firms, post-SOX sample
SALES/EV 480 1.46 0.92 2.00 523 1.13 0.75 1.40

SALES_$MILL 480 47.00 15.00 99.00 523 79.00 20.00 170.00
TOTAL EV 480 54.00 22.00 100.00 523 120.00 27.00 240.00
(The table is continued on the next page.)

TABLE 1 (continued)
Panel C: U.S. takeover sample, public acquisition of private targets
SIZE 480 16.51 16.50 1.61 523 16.77 16.80 1.79

BIG4 480 0.61 1.00 0.49 523 0.37 0.00 0.48
TIME 461 62.79 60.00 35.18 452 72.71 70.00 40.81
DEAL TIME 461 4.06 4.11 0.45 452 4.19 4.26 0.47
PRED_ICW 480 0.56 0.57 0.08 523 0.54 0.52 0.09
GROWTH 480 0.60 0.16 1.93 523 0.75 0.15 2.45
MARGIN 480 0.45 0.37 0.28 523 0.49 0.43 0.30
RD 480 0.06 0.00 0.22 523 0.07 0.00 0.20
LEVERAGE 480 0.11 0.03 0.17 523 0.12 0.03 0.18
WORKING_CAP 480 0.23 0.21 0.30 523 0.27 0.25 0.31
Panel D: U.K. takeover sample public acquisition of private targets
SALES/EV 139 1.92 1.32 2.15 110 2.06 1.10 3.21

SALES_$MILL 139 32.48 12.13 76.62 110 53.33 23.58 101.95
TOTAL EV 139 23.79 10.25 51.43 110 42.65 18.78 69.70
SIZE 139 16.41 16.31 1.25 110 16.78 16.98 1.50
TIME 139 33.93 17.00 63.34 110 13.54 0.00 26.86
DEAL TIME 139 2.00 2.83 1.95 110 1.23 0.00 1.68
GROWTH 139 0.22 0.08 0.67 110 0.20 0.11 0.36
LEVERAGE 139 0.13 0.07 0.17 110 0.14 0.07 0.19
WORKING_CAP 139 0.11 0.07 0.23 110 0.15 0.15 0.24
period to $120 million in the post-SOX period. Finally, the U.S. and U.K takeover firms
are comparable in terms of size.20
Results
Table 2 presents the results of the logit model in (1), which examines whether there has been
a shift in the distribution of private firm exit strategies post-SOX. Consistent with our
expectations, model 1 displays a negative and significant coefficient on SOX. Once we parti-
tion SOX by interacting it with SIZE_SMALL and SIZE_LARGE in model 2, we find that
the coefficient on the interaction terms are also significantly negative. The coefficient on
SOX * SIZE_SMALL is more negative than the coefficient on SOX * SIZE_LARGE and
an F-test reveals that the difference in the coefficient is statistically significant at the 2 per-
cent level (i.e., Prob > v2 = 0.0108). These collective results suggest that, consistent with
Hypotheses 1 and 2, SOX did have an effect on shifting the distribution of exit strategies
20. For the sake of brevity we do not tabulate descriptive statistics for our remaining control samples. How-
ever, we note that, in the post-SOX era, the mean sales are $1.85 million and $1.6 billion for the U.S. pri-
vate target/U.S. private acquirer and U.S. public target/U.S. public acquirer samples, respectively.

TABLE 2
U.S. IPO versus takeover decision
(1) (2)
Variable IPO IPO
SOX 1.600***
(3.27)
SOX * SIZE_LARGE 1.162**
(2.27)
SOX * SIZE_SMALL 2.189***
(4.08)
SIZE 0.865*** 0.835***
(18.85) (19.43)
LIQUIDITY 9.277*** 9.361***
(22.04) (21.21)
HHI 2.339* 2.469**
(1.95) (2.07)
PB 0.826*** 0.883***
(5.05) (4.95)
IND_DA 0.045* 0.048*
(1.85) (1.93)
IND_TAN 1.891* 1.921*
(1.83) (1.85)
IND_MTB 0.009 0.009
(0.73) (0.77)
HITECH 0.459* 0.454*
(1.77) (1.68)
IND_FERROR 0.054 0.061
(1.13) (1.19)
MKTRF 0.096*** 0.095***
(2.84) (2.86)
MKTRF1 0.033 0.035
(1.13) (1.15)
HML 0.038* 0.037*
(1.76) (1.78)
HML1 0.022 0.022
(0.77) (0.79)
SMB 0.080* 0.080*
(1.86) (1.86)
SMB1 0.019 0.023
(0.40) (0.48)
RF 84.256 111.094
(0.52) (0.69)
Intercept 8.407*** 7.737***
(8.81) (8.11)
Pseudo R2 0.792 0.794
Observations 3,738 3,738

TABLE 2 (continued)
v2-Test: Column (2) SOX * SIZE_LARGE = SOX * SIZE_SMALL p-value = 0.0108.
Marginal effects for variables of interest
Variable dy/dx Std. Err. z P >z

Table 2, Column (1) SOX 0.130 0.041 3.15 0.002
Table 2, Column (2) SOX * SIZE_LARGE 0.094 0.044 2.16 0.031
Table 2, Column (2) SOX * SIZE_SMALL 0.251 0.072 3.48 0.001
Notes:
This table presents the results of our IPO versus takeover analyses for the sample of U.S. private
firms. Models (1) and (2) are estimated using logistic regression. Model (1) estimates the mean
pre-post SOX effect. Model (2) presents the mean pre-post SOX effect for large and small firms.
The dependent variable for the logistic model is the choice for U.S. private firms on whether or
not to exit the market via public acquisition or IPO. The binary dependent variable equals 1 if
the private firm chooses to pursue an IPO. All variables are defined in Appendix A. Z-statistics
in parentheses. *, **, *** denote significance at the 10 percent, 5 percent, and 1 percent level for
a two-tailed z-test. Standard errors are clustered by year and industry (2-digit SIC code).
from IPOs to acquisition and that this shifting of strategies was particularly prevalent for
smaller U.S. private firms.21
In Table 3 we incorporate a U.K. control group both separately and then pooled with
the U.S. sample. Consistent with our expectations, we find that the coefficients on neither
the SOX indicator variable nor the SOX * SIZE_SMALL or SOX * SIZE_LARGE inter-
action terms load significantly in models 1 and 2 when assessing the choice of U.K. pri-
vate firms to pursue either an IPO or acquisition by a public company. Furthermore an F-
test reveals no statistically significant differences between SOX * SIZE_SMALL and
SOX * SIZE_LARGE in the U.K. setting (i.e., Prob > v2 = 0.1700). The evidence implies
that the U.S. results are not driven by contemporaneous, non-SOX events or general
global trends. Finally, in models 3 and 4, we pool the U.S. and U.K. samples and the
tenor of the results remains the same. Specifically, in model 3, the estimated coefficient of
1.421 for the SOX * US interaction term implies that U.S. firms were less likely to
choose the IPO option in the post-SOX era, a pattern that was not evident in the United
Kingdom. Using an F-test, we find significant differences in the coefficients for SOX * US
and SOX * UK (i.e., Prob > v2 = 0.0370). In model 4, we run a pooled model with triple
interactions to account for firm size and country of origin. Once again, we find that U.S.
firms of all sizes were significantly less likely to choose an IPO in the post-SOX era,
as implied by the estimated coefficients of 1.798 and 1.052 for SOX *
SIZE_SMALL * US and SOX * SIZE_LARGE * US, respectively. This pattern is not
reflected in the United Kingdom. Our F-tests reveal that for small firms, the U.S. interac-
tion terms are significantly different from their U.K. counterparts (i.e., Prob > v2 =
0.0202) and for large firms, the U.S. interaction terms are not significantly different from
their U.K. counterparts (i.e., Prob > v2 = 0.1361).
Moving to the tests of Hypothesis 3, we turn to Table 4, which assesses the inverse
multiples achieved when U.S. firms acquire U.S. private targets. For all panels, we note
that model 1 pools the pre- and post-SOX observations, model 2 assesses only the pre-
SOX observations, and model 3 assesses only the post-SOX observations. Table 4, panel
21. In untabulated analysis, we illustrate that our results are robust to excluding firm observations from the
financial sector, the tech bubble years, and the financial crisis years.

A presents results when SIZE is the proxy for SOX compliance. We note that in the
pre-SOX period, SIZE has a significant positive coefficient of 0.210, which implies that in
the pre-SOX era, deal multiples decrease in firm size.22 The corresponding coefficient in
the post-SOX period is 0.079, implying a decline in deal multiples for smaller firms, rela-
tive to the pre-SOX period. This decline is plausible if pre-acquisition SOX compliance is
lower for smaller firms. To provide further inferences with respect to SIZE’s impact, we
assess the results of model 1 which pools the pre- and post-SOX observations and incor-
porates a SOX * LARGE and SOX * SMALL interaction term. We find that the coeffi-
cient on SOX * LARGE, 0.352, is significantly negative while the coefficient on
SOX * SMALL, 0.124, is insignificant. Thus, relative to the pre-SOX period, the post-
SOX period association between deal multiples and firm size has increased. We attribute
this increase to the extent of SOX compliance, given the mild assumption that firm charac-
teristics other than SOX compliance are stable across the pre- and post-SOX periods.
In Table 4, panels B through D, we assess our remaining SOX proxies and our results
are consistent with our expectations. Specifically, in panel B, the impact of BIG4 is insig-
nificant in the pre-SOX era and significantly negative in the post-SOX era, as implied by
the coefficient on BIG4 of 0.385. This result is consistent with firms achieving higher deal
multiples in the post-SOX era if they were audited by a Big 4 auditor. When we pool the
pre- and post-SOX observations in model 1, the coefficient on SOX * BIG4 is significantly
negative while the coefficient on SOX * NONBIG4 is insignificant. Moreover, an F-test
reveals that the coefficients are significantly different from one another (i.e., Prob > v2 =
0.001). This result echoes those generated in models 2 and 3.
In panel C, the impact of DEAL TIME is weakly significant in the pre-SOX era and sig-
nificantly positive in the post-SOX era, as implied by the coefficient on DEAL TIME of
0.227 and 0.198, respectively. When we pool the pre- and post-SOX observations in model 1,
the coefficient on SOX * SHORT is significantly negative while the coefficient on
SOX * LONG is insignificant. This result is consistent with firms achieving higher deal mul-
tiples in the post-SOX era, relative to the pre-SOX era, if deal completion time is shorter. An
F-test reveals that the coefficients are significantly different from one another (i.e., Prob > v2
= 0.001). These results echo those found in the unpooled samples in models 2 and 3.
In panel D, the impact of PRED_ICW is insignificant in the pre-SOX era and signifi-
cantly positive in the post-SOX era, as implied by the coefficient on PRED_ICW of 3.792.
This result is consistent with firms achieving higher deal multiples in the post-SOX era if
they have smaller predicted ICW. When we pool the pre- and post-SOX observations in
model 1, the coefficient on SOX * SMALLP of 0.378 is significantly negative while the
coefficient on SOX * LARGEP is insignificant. Thus, firms achieve higher deal multiples
in the post-SOX era, relative to the pre-SOX era, if they have smaller predicted ICW. An
F-test reveals that the coefficients are significantly different from one another (i.e., Prob >
v2 = 0.020).
In Table 5, we retest our acquisition models on our first group of control samples. In
panels A and B, we assess a sample of U.K. private targets that are acquired by U.K. pub-
lic firms. We note that, due to data limitations, we can construct one proxy for SOX com-
pliance (SIZE) and one inverse proxy for SOX compliance (DEAL TIME). In both the
pooled and unpooled models, we note that neither SIZE nor DEAL TIME has an impact
on deal multiples in the post-SOX period. This evidence is consistent with our expectations,
as our proxies for pre-acquisition SOX compliance should have no impact on deal multi-
ples when both the acquirer and the target are unaffected by SOX (as in the U.K. setting).
22. Firm size proxies for a number of value drivers besides the extent of pre-acquisition SOX compliance,
including risk and growth. Though riskier, smaller firms have greater growth potential in ways that might
not be measured by our proxy for firm growth; namely, one-year sales growth of the target.

TABLE 3
IPO versus takeover decision: United States and United Kingdom
(1) (2) (3) (4)

IPO IPO IPO IPO
Variable UK=1 UK=1
SOX 0.566
(1.15)
SOX * SIZE_LARGE 0.352
(0.60)
SOX * SIZE_SMALL 0.721
(1.63)
SOX * UK 0.156
(0.35)
SOX * US 1.421***
(3.87)
SOX * SIZE_SMALL * UK 0.323
(0.82)
SOX * SIZE_SMALL * US 1.798***
(4.50)
SOX * SIZE_LARGE * UK 0.093
(0.16)
SOX * SIZE_LARGE * US 1.052***
(2.59)
SIZE 0.322*** 0.302*** 0.556*** 0.533***
(5.04) (4.25) (14.90) (14.41)
LIQUIDITY 4.214*** 4.221*** 6.681*** 6.708***
(11.22) (11.21) (22.51) (22.13)
HHI 3.756** 3.720** 2.461*** 2.497***
(2.49) (2.49) (2.79) (2.87)
PB 0.848* 0.869* 0.632** 0.656***
(1.85) (1.85) (2.52) (2.59)
IND_DA 0.341 0.338 0.015 0.012
(1.10) (1.09) (0.42) (0.34)
IND_TAN 1.148 1.110 1.422* 1.417*
(1.10) (1.08) (1.73) (1.75)
IND_MTB 0.022 0.022 0.015 0.015
(1.34) (1.33) (1.26) (1.28)
HITECH 0.035 0.023 0.265 0.268
(0.09) (0.06) (1.16) (1.15)
IND_FERROR 0.094** 0.093** 0.088*** 0.088***
(2.12) (2.13) (3.66) (3.64)
MKTRF 1.965 1.917 0.078*** 0.078***
(0.62) (0.61) (2.84) (2.84)
MKTRF1 2.594 2.609 0.021 0.021
(0.68) (0.69) (0.79) (0.80)
HML1 4.379* 4.299* 0.025 0.026
(1.75) (1.73) (1.24) (1.27)
HML2 0.419 0.393 0.012 0.012
(0.16) (0.15) (0.47) (0.48)
SMB1 7.500 7.395 0.056 0.055
(1.44) (1.44) (1.61) (1.58)

TABLE 3 (continued)
(1) (2) (3) (4)

IPO IPO IPO IPO
Variable UK=1 UK=1
SMB2 1.482 1.515 0.005 0.007

(0.40) (0.41) (0.14) (0.17)
RF 114.696 115.232 26.637 29.257
(1.21) (1.21) (0.53) (0.57)
Intercept 0.673 0.362 4.823*** 4.400***
(0.36) (0.19) (6.97) (6.23)
Pseudo R2 0.338 0.338 0.635 0.636
Observations 1,515 1,515 5,253 5,253
v2-Test:
Column (2): SOX * SIZE_LARGE = SOX * SIZE_SMALL p-value = .1700.
Column (3): SOX * US= SOX * UK p-value = 0.0370.
Column (4): SOX * SIZE_SMALL * US = SOX * SIZE_SMALL * UK p-value = 0.0202.
Column (4): SOX * SIZE_LARGE * US = SOX * SIZE_LARGE * UK p-value = 0.1361.
Marginal effects for variables of interest
Variable dy/dx Std. err. z P>z
Table 3, Column (1) SOX 0.047 0.034 1.39 0.164

Table 3, Column (2) SOX * SIZE_LARGE 0.028 0.044 0.64 0.520
Table 3, Column (2) SOX * SIZE_SMALL 0.068 0.037 1.86 0.063
Table 3, Column (3) SOX * UK 0.012 0.029 0.42 0.674
Table 3, Column (3) SOX * US 0.166 0.035 4.75 0.000
Table 3, Column (4) SOX * SIZE_SMALL * UK 0.029 0.035 0.82 0.411
Table 3, Column (4) SOX * SIZE_SMALL * US 0.256 0.048 5.34 0.000
Table 3, Column (4) SOX * SIZE_LARGE * UK 0.009 0.033 0.26 0.793
Table 3, Column (4) SOX * SIZE_LARGE * US 0.118 0.043 2.73 0.006
Notes:
This table presents the results of our IPO versus takeover analyses for the sample of U.K. private
firms (columns 1 and 2) and the pooled sample of U.S. and U.K. private firms (columns 3 and
4). Models (1)–(4) are estimated using logistic regression. Model (1) estimates the mean pre-/
post-SOX effect for U.K. firms. Model (2) presents the mean pre-/post-SOX effect for large and
small U.K. firms. Model (3) presents the mean pre-/post-SOX effect for U.S. and U.K. firms.
Model (4) presents the mean pre-/post-SOX effect for large and small U.S. and U.K. firms. The
dependent variable for the logistic model is the choice for private firms on whether or not to
exit the market via public acquisition or IPO. The binary dependent variable equals 1 if the
private firm chooses to pursue an IPO. All variables are defined in Appendix A. Z-statistics in
parentheses. *, **, *** denote significance at the 10 percent, 5 percent, and 1 percent level for a
two-tailed z-test. Standard errors are clustered by year and industry (2-digit SIC code).
In panel C, we assess a sample of U.S. private targets that are acquired by U.S. pri-
vate acquirers. We note that due to data limitations, we can only utilize SIZE as a mea-
sure of the private target’s level of pre-acquisition SOX compliance. We find that in both
the pooled and unpooled models, SIZE has no impact on deal multiples in the post-SOX
period. This evidence is consistent with our expectations, as our proxies for pre-acquisition
SOX compliance should have no impact on deal multiples when both the acquirer and tar-
get are unaffected by SOX (as in the U.S. private acquirer setting).

TABLE 4
SALES/EV multiples regression for U.S. public acquisition of private targets using full, pre- and
post-SOX samples
Panel A: SIZE used as proxy for SOX compliance
(1) (2) (3)

Variable SALES/EV SALES/EV SALES/EV
SOX * LARGE 0.352***

(3.28)
SOX * SMALL 0.124
(0.86)
SIZE 0.175*** 0.210*** 0.079*
(5.16) (3.38) (1.77)
GROWTH 0.046** 0.001 0.051***
(2.32) (0.03) (3.09)
MARGIN 1.557*** 1.763*** 1.329***
(5.67) (3.74) (3.91)
RD 0.490*** 0.406* 0.722
(5.25) (1.79) (.)
LEVERAGE 1.101*** 1.005* 1.055***
(4.01) (1.78) (3.46)
WORKING_CAP 0.082 0.164 0.268
(0.32) (0.48) (0.81)
Intercept 1.230** 1.519 0.449
(1.97) (1.33) (0.78)
Observations 1,003 480 523
Adj. R2 0.171 0.219 0.119
Panel B: BIG4 used as proxy for SOX compliance
(1) (2) (3)

SOX * BIG4 0.510***

(4.86)
SOX * NONBIG4 0.077
(0.72)
BIG4 0.235 0.385***
(1.11) (3.64)
SIZE 0.178*** 0.240*** 0.125**
(5.41) (3.36) (2.38)
GROWTH 0.043** 0.004 0.047***
(2.28) (0.07) (3.00)
MARGIN 1.529*** 1.740*** 1.293***
(6.16) (3.86) (4.48)
RD 0.404*** 0.319 0.598
(4.96) (1.51) (.)
LEVERAGE 1.078*** 1.036* 1.015***
(3.87) (1.81) (3.35)
WORKING_CAP 0.082 0.175 0.231
(0.31) (0.51) (0.68)

TABLE 4 (continued)
(1) (2) (3)

Intercept 1.435*** 1.970* 0.278

(2.72) (1.72) (0.42)
Adj. R2 0.176 0.220 0.130
Panel C: DEAL TIME used as proxy for SOX compliance
(1) (2) (3)

SOX * LONG 0.172

(1.19)
SOX * SHORT 0.393***
(2.78)
DEAL_TIME 0.227* 0.198**
(1.73) (2.32)
SIZE 0.153*** 0.178*** 0.109**
(3.84) (2.69) (2.01)
GROWTH 0.043* 0.000 0.036*
(1.96) (0.01) (1.66)
MARGIN 1.559*** 1.545*** 1.415***
(4.86) (2.77) (4.40)
RD 0.429*** 0.398 0.733***
(4.38) (1.60) (9.87)
LEVERAGE 1.1162*** 1.289*** 0.998**
(4.66) (3.12) (2.53)
WORKING_CAP 0.010 0.206 0.086
(0.04) (0.78) (0.21)
Intercept 0.907 1.825** 0.291
(1.40) (1.98) (0.23)
Observations 913 461 452
Adj. R2 0.207 0.266 0.162
Panel D: PRED_ICW used as proxy for SOX compliance
(1) (2) (3)

SOX * LARGEP 0.097

(0.68)
SOX * SMALLP 0.378***
(4.49)
PRED_ICW 2.164 3.792***
(1.05) (3.43)
SIZE 0.178*** 0.303** 0.240***
(6.14) (2.60) (3.03)
GROWTH 0.044** 0.005 0.044***
(2.33) (0.09) (2.88)

TABLE 4 (continued)
(1) (2) (3)

MARGIN 1.543*** 1.742*** 1.293***

(5.78) (3.86) (4.47)
RD 0.463*** 0.326 0.594
(6.11) (1.54) (.)
LEVERAGE 1.112*** 1.035* 1.024***
(4.08) (1.81) (3.36)
WORKING_CAP 0.081 0.175 0.230
(0.31) (0.51) (0.68)
Intercept 1.420*** 1.948* 0.287
(2.73) (1.69) (0.43)
Adj. R2 0.172 0.220 0.130
F-test:
Panel A, column (1): SOX * LARGE = SOX * SMALL p-value = 0.149.
Panel B, column (1): SOX * BIG4 = SOX * NONBIG4 p-value = 0.001.
Panel C, column (1): SOX * LONG = SOX * SHORT p-value = 0.0318.
Panel D, column (1): SOX * LARGEP = SOX * SMALLP p-value = 0.020.
Notes:
This table presents the results of our deal multiple analyses for the sample of U.S. public acquisition
of U.S. private targets. Each panel separately presents the results for each of our SOX
compliance proxies. Column (1) presents the results using the full pre-/post-SOX sample.
Column (2) presents the results for the pre-SOX sample. Column (3) presents the results for
the post-SOX sample. The dependent variable for all models is the inverse SALES/EV
multiple. All variables are defined in Appendix A. t-statistics in parentheses. *, **, *** denote
significance at the 10 percent, 5 percent, and 1 percent level for a two-tailed t-test. Standard
errors are clustered by year and industry (2-digit SIC code). Two-way clustering of standard
errors prevents computation of t-statistics for certain coefficients, denoted (.).
In Table 6, panels A through D, we retest the model on a sample of public targets

that are acquired by public firms. We note that in the post-SOX period, none of the coeffi-
cients on our proxies for SOX compliance load significantly in the predicted direction.
Moreover, we find that none of the SOX compliance terms are significant in any of the
pooled models. These results are consistent with our expectations.
Finally, for U.S. private targets acquired by U.S. public firms, we attempt to gener-
ate a range of estimates in terms of the discount in deal proceeds achieved by a median-
sized private target that is not SOX compliant. We calculate the deal proceeds for long
(short) DEAL TIME firms in the pre-SOX period by using the coefficients in Table 4,
panel C, column 2, setting all variables at their medians, and setting DEAL TIME to
one standard deviation above (below) its mean. We then subtract the median proceeds
achieved for long deals from short deals to generate the discount to spending more time
on a deal in the pre-SOX period. Next, using the coefficients from Table 4, panel C, col-
umn 3, we follow the same procedure to generate the discount to spending more time on
a deal in the post-SOX period. Finally, we subtract the discount generated in the pre-
SOX period from the discount generated in the post-SOX period. The resulting value—a

TABLE 5
SALES/EV multiples regression for U.K. public acquisition of private targets and U.S. private
acquisition of private targets using full, pre- and post-SOX samples
Panel A: SIZE used as proxy for SOX compliance, U.K. sample
(1) (2) (3)

SOX * LARGE 0.501

(0.54)
SOX * SMALL 0.073
(0.28)
SIZE 0.224 0.411 0.337
(1.06) (1.55) (1.17)
GROWTH 0.002 0.041 0.458
(0.01) (0.11) (0.60)
LEVERAGE 0.539 1.670 1.325
(0.63) (0.50) (0.67)
WORKING_CAP 0.921* 1.553*** 0.827*
(1.92) (3.15) (1.76)
Intercept 3.946 6.540 4.043
(0.96) (1.17) (0.82)
Adj. R2 0.176 0.0251 0.448
Panel B: DEAL TIME used as proxy for SOX compliance, U.K. sample
(1) (2) (3)

SOX * LONG 0.454

(0.42)
SOX * SHORT 0.163
(0.50)
DEAL_TIME 0.085 0.290
(1.32) (0.85)
SIZE 0.264 0.452 0.246
(1.43) (1.55) (0.79)
GROWTH 0.014 0.030 0.529
(0.06) (0.08) (0.64)
LEVERAGE 0.582 1.661 1.196
(0.73) (0.49) (0.75)
WORKING_CAP 0.957* 1.525*** 0.899*
(1.92) (2.77) (1.71)
Intercept 4.819 6.915 2.705
(1.30) (1.16) (0.68)
Adj. R2 0.175 0.0192 0.461

TABLE 5 (continued)
Panel C: SIZE used as proxy for SOX compliance, U.S. private acquisition sample
(1) (2) (3)

SALES/EV SALES/EV SALES/EV
SOX * LARGE 0.215

(.)
SOX * SMALL 0.176
(.)
SIZE 0.077 0.073 0.069
(1.39) (0.65) (1.44)
MARGIN 1.911*** 1.837 1.878***
(5.96) (1.53) (5.28)
LEVERAGE 1.680*** 2.536*** 1.463***
(8.26) (8.39) (8.45)
WORKING_CAP 0.127 0.118 0.093
(0.51) (0.23) (0.38)
Intercept 2.662*** 2.845 3.385***
(3.09) (1.10) (4.21)
Adj. R2 0.220 0.157 0.213
F-test:
Panel A, column (1): SOX * LARGE = SOX * SMALL p-value =0.526
Panel B, column (1): SOX * LONG = SOX * SHORT p-value =0.726
Panel C, column (1): SOX * LARGE = SOX * SMALL p-value =0.723
Notes:
This table presents the results of our deal multiple analyses for the samples of U.K. public
acquisition of U.K. private targets (panels A and B) and U.S. private acquisition of U.S.
private targets (panel C). Each panel separately presents the results for the SOX compliance
proxies that are available for each sample. Column (1) presents the results for the full
pre-/post-SOX sample. Column (2) presents the results for the pre-SOX sample. Column (3)
presents the results for the post-SOX sample. The dependent variable for all models is the
inverse SALES/EV multiple. All variables are defined in Appendix A. t-statistics in
parentheses. *, **, *** denote significance at the 10 percent, 5 percent, and 1 percent level for
a two-tailed t-test. Standard errors are clustered by year and industry (2-digit SIC code). Two-
way clustering of standard errors prevents computation of t-statistics for certain coefficients,
denoted (.).
discount of $1.07 million—is attributed to the cost of being less SOX compliant prior to
acquisition in the post-SOX era. Additionally, we follow an identical methodological
approach but instead assess SIZE as a proxy for SOX compliance. The cost we attribute
to being less SOX compliant when using SIZE as a proxy in the post-SOX era is $2.39
million.
Krishnan et al. (2008) suggests that firms pay, on average, ongoing annual SOX 404
costs of $1.04 million. Thus, our range for deal discounts related to not being SOX com-
pliant is reasonable given that there may be other, non-404 costs related to SOX’s adop-
tion not tabulated by Krishnan et al. (2008). Moreover, Krishnan et al. (2008) assesses
public companies that had already developed some form of SOX infrastructure, so the
$1.04 million costs they document incorporate only ongoing costs related to SOX as
opposed to initial SOX costs. In contrast, a SOX infrastructure still needs to be developed
for our private targets, which may lead to higher costs overall.

TABLE 6
SALES/EV multiples regression for U.S. public acquisition of public targets using full, pre- and
post-SOX samples
Panel A: SIZE used as proxy for SOX compliance
(1) (2) (3)

SOX * LARGE 0.014

(0.15)
SOX * SMALL 0.048
(0.54)
SIZE 0.030 0.036 0.008
(1.50) (1.57) (0.13)
GROWTH 0.226 0.341 0.715
(0.52) (0.88) (0.86)
MARGIN 0.317** 0.362** 0.165
(2.31) (2.36) (1.29)
RD 0.941 0.781 0.952*
(1.30) (0.75) (1.78)
LEVERAGE 0.601*** 0.438** 0.899**
(3.47) (2.20) (2.36)
WORKING_CAP 0.471** 0.209 0.935***
(2.28) (0.76) (3.96)
Intercept 0.264 0.043 2.179
(0.60) (0.07) (1.61)
Adj. R2 0.225 0.203 0.348
(1) (2) (3)

SOX * BIG4 0.067

(0.94)
SOX * NONBIG4 0.160
(1.23)
BIG4 0.282 0.235
(.) (1.28)
SIZE 0.038** 0.045** 0.015
(2.03) (1.99) (0.25)
GROWTH 0.191 0.325 0.643
(0.46) (0.83) (0.79)
MARGIN 0.323** 0.365** 0.174
(2.45) (2.33) (1.41)
RD 0.933 0.734 0.855*
(1.28) (0.73) (1.67)
LEVERAGE 0.589*** 0.448** 0.874**
(3.40) (2.37) (2.37)
WORKING_CAP 0.442** 0.198 0.852***
(2.18) (0.73) (3.01)

TABLE 6 (continued)
(1) (2) (3)

Intercept 0.079 0.135 1.807

(0.19) (0.24) (1.29)
Adj. R2 0.226 0.206 0.352
Panel C: DEAL TIME used as proxy for SOX compliance
(1) (2) (3)

SOX_LONG 0.029
(0.34)
SOX_SHORT 0.034
(0.46)
DEAL_TIME 0.165*** 0.047
(4.74) (0.38)
SIZE 0.032* 0.040* 0.004
(1.72) (1.90) (0.07)
GROWTH 0.225 0.339 0.715
(0.52) (0.91) (0.86)
MARGIN 0.319** 0.381** 0.170
(2.40) (2.48) (1.29)
RD 0.950 0.765 0.933*
(1.30) (0.78) (1.90)
LEVERAGE 0.599*** 0.415** 0.889**
(3.50) (2.20) (2.46)
WORKING_CAP 0.469** 0.246 0.951***
(2.27) (0.86) (3.75)
Intercept 0.219 0.960 1.981
(0.52) (1.45) (1.65)
Adj. R2 0.225 0.209 0.346
(1) (2) (3)

SOX_LARGEP 0.045
(0.49)
SOX_SMALLP 0.017
(0.19)
PRED_ICW 3.026*** 2.086
(5.02) (1.16)
SIZE 0.030 0.137*** 0.075
(1.59) (3.86) (0.82)
GROWTH 0.231 0.331 0.661
(0.54) (0.85) (0.81)

TABLE 6 (continued)
(1) (2) (3)

MARGIN 0.318** 0.360** 0.163

(2.31) (2.35) (1.35)
RD 0.944 0.734 0.858*
(1.30) (0.73) (1.72)
LEVERAGE 0.601*** 0.451** 0.876**
(3.47) (2.42) (2.35)
WORKING_CAP 0.470** 0.199 0.862***
(2.29) (0.73) (3.08)
Intercept 0.256 0.148 1.861
(0.61) (0.27) (1.35)
Adj. R2 0.225 0.206 0.350
F-test:
Panel A, column (1): SOX * LARGE = SOX * SMALL p-value =0.526.
Panel B, column (1): SOX * LONG = SOX * SHORT p-value =0.726.
Panel C, column (1): SOX * LARGE = SOX * SMALL p-value =0.723.
Notes:
This table presents the results of our deal multiple analyses for the samples of U.K. public
acquisition of U.K. private targets (panels A and B) and U.S. private acquisition of U.S.
private targets (panel C). Each panel separately presents the results for the SOX compliance
proxies that are available for each sample. Column (1) presents the results for the full pre-/post-
SOX sample. Column (2) presents the results for the pre-SOX sample. Column (3) presents the
results for the post-SOX sample. The dependent variable for all models is the inverse SALES/
EV multiple. All variables are defined in Appendix A. t-statistics in parentheses. *, **, ***
denote significance at the 10 percent, 5 percent, and 1 percent level for a two-tailed t-test.
Standard errors are clustered by year and industry (2-digit SIC code). Two-way clustering of
standard errors prevents computation of t-statistics for certain coefficients, denoted (.).
7. Additional analyses
The effect of SOX on a broader set of private company exit strategies
We assess how the propensity for private U.S. firms to exit the private market has chan-
ged from the pre-SOX era to the post-SOX era across five different exit strategies. Our
analysis proceeds as follows: First, we total up the exits of U.S. private firms across five
exit types: domestic IPO, domestic public acquisition, foreign IPO, foreign acquisition,
and private domestic acquisition. Next, for each exit type, we calculate the number of exits
as a percentage of all exits in both the pre- and post-SOX period. Finally, for each exit
type, we test whether the number of exits as a percentage of all exits is significantly differ-
ent between the pre- and post-period.
Given the hypotheses in our paper, we predict that acquisition by a public target
should be more attractive than pursuing an IPO in the post-SOX era. Moreover, foreign
IPOs, foreign acquisitions, and U.S. private acquisitions of U.S. private targets should
have become comparatively more popular in the post-SOX era relative to both the U.S.
IPO and the U.S. public acquisition options, as foreign companies and U.S. private firms
are generally not subject to SOX costs.

TABLE 7
Distribution of private company exit strategies in pre- and post-SOX samples
Panel A: Pre-SOX sample
Domestic Domestic Total

Domestic public Foreign Foreign private private
Year IPO acquirer IPO acquirer acquirer exits
1995 606 76 7 123 4 816

1996 874 333 14 156 3 1380
1997 657 430 7 213 7 1314
1998 456 678 9 219 13 1375
1999 733 589 16 228 17 1583
2000 550 521 14 344 33 1462
2001 160 280 9 197 46 692
2002 176 185 4 176 96 637
2003 127 274 6 134 136 677
Total 4339 3366 86 1790 355 9936
% of Total 43.67% 33.88% 0.87% 18.02% 3.57% 100.00%
Panel B: Post-SOX sample
Domestic Domestic Total

Domestic public Foreign Foreign private private
Year IPO acquirer IPO acquirer acquirer exits
2004 273 367 7 193 179 1019

2005 267 378 25 228 163 1061
2006 231 374 21 269 176 1071
2007 288 400 27 310 162 1187
2008 48 258 10 211 90 617
2009 22 18 2 50 12 104
Total 1129 1795 92 1261 782 5059
% of Total 22.32% 35.48% 1.82% 24.93% 15.46% 100.00%
Panel C: Difference in proportions pre- versus post-SOX
Domestic Domestic
Domestic public Foreign private
IPO acquirer Foreign IPO acquirer acquirer
% Difference 21.4%*** 1.61%* 0.95%*** 6.91%*** 11.88%***
Notes:
The percentage difference row indicates the difference in the number of exit strategies as a
proportion of all exit strategies in the post-SOX period, less the same value in the pre-SOX
period. ***,**,* denote significance levels of 1 percent, 5 percent, and 10 percent respectively
for a test of differences in two proportions.
The results, presented in Table 7, are consistent with our conjectures. As indicated in
panel C, the percentage of U.S. private firms that choose the domestic IPO option as a
percentage of all exit strategies is 21.35 percent lower in the post-SOX era than in the pre-
SOX era. The percentage of U.S. private firms that choose the U.S. public acquisition
option as a percentage of all exit strategies is 1.61 percent higher in the post-SOX era than
in the pre-SOX era. The percentage of U.S. private firms that choose the foreign IPO

option as a percentage of all exit strategies is 0.95 percent higher in the post-SOX era than
in the pre-SOX era. The percentage of U.S. private firms that choose the foreign acquisi-
tion option is 6.91 percent higher in the post-SOX era than in the pre-SOX era. The per-
centage of U.S. firms that choose the U.S. private acquisition option is 11.88 percent
higher in the post-SOX era than in the pre-SOX era. Finally, we note that there are more
domestic IPO firms and domestic acquisition firms in the analysis in Table 7 than in the
analysis in Table 3, as we do not need to exclude firms due to data restrictions.
Information asymmetry, SOX, and deal multiples

Our argument suggests that increased SOX readiness by a private target should lead to
higher future cash flows for the acquirer and in turn, a higher deal multiple for the private
target. An alternate interpretation of our results might be that, if SOX compliance
decreases the buyer’s information asymmetry with the target, this may lead to lower dis-
count rates used by the acquirer when valuing the target, and in turn, a higher purchase
price and deal multiple for the target.
We attempt to rule out this information asymmetry argument by controlling for the
degree of information asymmetry between the target and the acquirer. Our proxy for
information asymmetry is PERC_CASH, the amount of cash (as a percentage of total
remuneration) that was used when purchasing the private target.23 We posit that, the more
uncertainty a buyer has about a potential target, the lower the percentage of cash the
acquirer will use when purchasing the target. For our sample of U.S. private targets
acquired by U.S. public firms, we repeat our tests tabulated in panel D of Table 4 after
including PERC_CASH as a control variable in the SALES/EV model which uses
PRED_ICW as an inverse proxy for SOX compliance. Untabulated results reveal that the
coefficient on PRED_ICW remains signed and significant as predicted despite the inclusion
of PERC_CASH. These results imply that PRED_ICW captures an effect that is incre-
mental to any reduction in information asymmetry that may arise from the target being
more SOX compliant and that higher pre-acquisition SOX compliance has a beneficial
effect on the acquirer’s future cash flows.
SOX and IPO deal proceeds

We additionally conduct our SALES/EV tests on our IPO sample firms. Our untabulated
analyses suggest that IPO firms are not penalized for having lower levels of pre-acquisition
SOX compliance (using similar proxies for pre-IPO levels of SOX compliance as we use
for our acquisition sample). We believe that this outcome occurs because, consistent with
evidence from S-1 filings from our sample firms (i.e., 85 percent of sample IPO firms dis-
cuss concerns over the substantial costs to becoming SOX compliant, prior to going pub-
lic), IPO firms appear to have a unilateral incentive to invest in SOX infrastructure prior
to going public.
Rerunning the tests using SDC data for the private target sample
In our initial analysis, we use data from Pratt’s Statsâ to generate our private target sam-
ple. We used Pratt’s Statsâ because it allowed us to construct a bigger sample and utilize
more proxy and control variables. In order to mitigate concerns that might result from
data differences between Pratt’s Statsâ and SDC, we obtained a sample of U.S. private
targets acquired by U.S. public-firms from SDC for the period 1994–2009 with available
data for our analyses. This resulted in a sample consisting of 468 observations, from which
23. We hand-collect this variable from the Pratt’s Stats database. Since not all private deals had data for this
item, the sample is reduced significantly when we include PERC_CASH. As a result, we do not use the
variable in the main model.

62 were also among the 1,003 observations with available data obtained from Pratt’s
Statsâ. In untabulated analysis, we conduct our IPO and takeover analyses using the SDC
sample instead of the Pratt’s Statsâ sample. For the IPO tests, our results are robust to
using SDC acquisition firms. For the takeover tests, the coefficients on the two proxies for
SOX compliance that we can construct (i.e., SIZE and DEAL TIME) are insignificant.
The lack of significance on the coefficients of interest may be attributed to smaller sample
size and correlated omitted variable bias. The SDC database is roughly half the size of the
Pratt’s Statsâ database (so the SDC test’s power is reduced vis-a-vis the Pratt’s Statsâ
test), and we may induce bias by having fewer control variables using the SDC sample
(driven by less data availability in the SDC database). Finally, we highlight that each
observation in the Pratt’s Statsâ sample was checked against the SEC EDGAR filings in
the process of collecting the auditor and prior-year sales data.
8. Conclusion and discussion

Our findings imply that the adoption of SOX has both changed the propensity for firms
to choose an IPO relative to being acquired and negatively impacted the proceeds
obtained by acquired targets. If the costs of SOX adversely affect the propensity for pri-
vate firms to pursue either exit strategy—IPO or acquisition by a public company—then
SOX might limit private firms’ options for financing in general, and both stifle opportuni-
ties for private companies to grow and adversely affect the competitiveness of U.S. firms
as they compete in the broader global marketplace.
A note of caution is in order, however, since we do not demonstrate an increased pro-
pensity for private firms to stay private. Suffice it to say that we demonstrate some stylized
facts that may be of interest to regulators in the United States and globally. Specifically,
SOX appears to have altered the exit strategy landscape for U.S private firms and fewer
private firms are opting to pursue an IPO in the United States. To the extent that one
alternative to a U.S. IPO is to be acquired by a U.S public company, it appears that pri-
vate deal proceeds are lower in the post-SOX era if a seller is not fully SOX compliant.
The target either incurs the SOX compliance costs or the proceeds are reduced to reflect
the fact that the public buyer has to incur these costs. Either way, the private target is
forced to incur SOX compliance costs.
While our analysis suggests that SOX costs may have driven these outcomes, it does
not preclude the possibility that regulators may have wanted to impose larger SOX costs
on certain private firms to prevent them from going public. Nevertheless, we note that the
U.S. House of Representatives recently (2009) passed H.R. 4173, which exempts small
public filers from the requirements of SOX 404b. Similarly, the SEC has repeatedly post-
poned compliance with SOX provisions for nonaccelerated filers. These actions seem to
indicate that U.S. regulators are mindful of the burdens SOX imposes on smaller public
companies and, perhaps implicitly, private companies that wish to become public.
Appendix A
Variable definitions
IPO MODEL
IPO = Indicator variable equal to 1 for IPO firms and 0 for private targets;
SOX = Indicator variable equal to 1 for years after 2003;
SIZE = Natural logarithm of total sales;
(The appendix is continued on the next page.)

Appendix A (continued)
SALES_$MILL = Total sales in millions;
SIZE_LARGE = Indicator variable equal to 1 if firm size is greater than or equal to the
median-sized private firm in the sample;
SIZE_SMALL = Indicator variable equal to 1 if firm size is less than the median-sized private
firm in the sample;
US = Indicator variable equal to 1 if the private firm comes from the United States;
UK = Indicator variable equal to 1 if the private firm comes from the United Kingdom;
LIQUIDITY = Percentage of the offer in cash for private targets and the ratio of secondary
shares offered to total shares for IPO firms;
HITECH = Indicator variable equal to 1 for private firms in the technology industry;
PB = Private Benefits is a dummy variable equal to 1 if the firm belongs to
either one of the following industry groups: two-digit SIC codes 13 (oil &
gas production), 28 (chemicals and allied products), 29 (oil refining), and
37 (transportation equipment). See Rajan and Wulf (2006) and Bayar and
Chemmanur (2011) for details;
HHI = Herfindahl Index for the private firm’s industry;
IND_DA = Industry mean (two-digit SIC grouping) leverage ratio calculated as total
debt scaled by total assets;
IND_TAN = Average tangible assets / total assets ratio (net property and equipment
scaled by total assets) for the firm’s two-digit SIC industry group;
IND_FERROR = The industry mean (two-digit SIC grouping) of analyst forecast error in the
prior year;
IND_MTB = Average market-to-book ratio for the private firm’s industry;
MKTRF = Quarterly calendar market return minus three-month T-bill rate;
RF = Three-month T-bill rate;
HML = Quarterly calendar return on a portfolio that is long on high book-to-market
stocks and short on low book-to-market stocks;
SMB = Quarterly calendar return on a portfolio that is long on small capitalization
stocks and short on large capitalization stocks.
MULTIPLE MODELS
SALES/EV = Inverse sales multiple calculated as total sales divided by enterprise value.
Enterprise value equals the sale price of firm’s equity plus total liabilities
less current liabilities;
SOX = Indicator variable equal to 1 for years after 2003;
SIZE = Natural logarithm of total sales;
LARGE = Indicator variable equal to 1 if firm size is greater than or equal to the
median-sized private firm in the sample;
SMALL = Indicator variable equal to 1 if firm size is less than the median-sized private
firm in the sample;
BIG4 = Indicator variable equal to 1 if the company is audited by a Big 4 auditor,
and zero otherwise;
NONBIG4 = Indicator variable equal to 1 if the company is audited by a non-Big 4
auditor and 0 otherwise;
DEAL TIME = (Natural logarithm of) The number of days between the filing of the 8-K
and the 8-K/A by the public acquirer, for private targets, and the (natural
logarithm of the) number of days between the SDC announcement and the
effective dates, for public targets;
LONG = Indicator variable equal to 1 if deal time is greater than or equal to the
median deal time for the sample;
(The appendix is continued on the next page.)

Appendix A (continued)
SHORT = Indicator variable equal to 1 if deal time is less than the median deal time
for the sample;
PRED_ICW = An imputed measure of pre-acquisition SOX compliance (following a
modified version of the approach used by Ashbaugh-Skaife et al. (2007)
LARGEP = Indicator variable equal to 1 if predicted ICW is greater than or equal to
the median predicted ICW for the sample;
SMALLP = Indicator variable equal to 1 if predicted ICW is less than the median
predicted ICW for the sample;
GROWTH = One-year sales growth of the target;
MARGIN = Operating margin calculated as sales minus cost of goods sold, scaled
by sales;
RD = Research and development expenditures divided by total assets;
LEVERAGE = Long-term liabilities divided by total assets;
WORKING_CAP = Current assets less current liabilities divided by total assets.
References
Ashbaugh-Skaife, H., D. Collins, and W. Jr. Kinney. 2007. The discovery and reporting of internal
control deficiencies prior to SOX-mandated audits. Journal of Accounting and Economics 44 (1):
166–92.
Advisory Committee of Smaller Public Companies. 2006. Final report of the advisory committee of
smaller public companies. Available online at http://www.sec.gov/info/smallbus/acspc/acspc-final-
report.pdf, retrieved June 10, 2013.
Audit Analytics. 2008. 404 Dashboard-Year 4 Update. Available online at http://auditanalytics.com/
doc/AuditAnalytics_SOX404_AICPA_Conf_12_08.pdf, retrieved June 10, 2013.
Bargeron, L., K. Lehn, and C. Zutter. 2010. Sarbanes-Oxley and corporate risk-taking. Journal of
Accounting and Economics 49 (1): 34–52.
Bayar, O., and T. Chemmanur. 2011. What drives the valuation premium in IPOs versus acquisi-
tions? An empirical analysis. Journal of Corporate Finance 18 (3): 451–75.
Beatty, R. 1989. Auditor reputation and the pricing of initial public offerings. The Accounting Review
64 (4): 693–709.
Brantley, J. 2005. Lessons of Sarbanes-Oxley for M&A transactions. Corporate Finance: A Euromon-
ey Publication, June: 6–8.
Brau, J., B. Francis, and N. Kohers. 2003. The choice of IPO versus takeover: Empirical evidence.
Journal of Business 76 (4): 583–612.
Chemmanur, T., and P. Fulghieri. 1999. A theory of the going-public decision. Review of Financial
Studies 12 (2): 249–79.
Chhaochharia, V., and Y. Grinstein. 2007. Corporate governance and firm value: The impact of the
2002 governance rules. The Journal of Finance 62 (4): 1789–825.
De Franco, G., I. Gavious, J. Jin, and G. Richardson. 2011. Do private company targets that hire
Big4 auditors receive higher proceeds? Contemporary Accounting Research 28 (1): 215–62.
DeFond, M., and C. Lennox. 2011. The effect of SOX on small auditor exits and audit quality. Jour-
nal of Accounting and Economics 52 (1): 21–40.
Dey, A. 2010. The chilling effect of Sarbanes-Oxley: A discussion of Sarbanes-Oxley and corporate
risk taking. Journal of Accounting and Economics 49 (1): 53–57.
DiGabriele, J. 2008. The Sarbanes-Oxley Act and the private company discount: An empirical inves-
tigation. Critical Perspective on Accounting 19 (8): 1105–21.
Hansen, B., G. Pownall, and X. Wang. 2009. The robustness of the Sarbanes Oxley effect on the
U.S. capital market. Review of Accounting Studies 14 (2–3): 401–39.

Holmstr€ om, B., and S. Kaplan. 2003. The state of U.S. corporate governance: What’s right and
what’s wrong? Journal of Applied Corporate Finance 15 (3): 8–20.
Holmstr€ om, B., and J. Tirole. 1993. Market liquidity and performance monitoring. The Journal of
Political Economy 101 (4): 678–709.
House of Representatives of the United States of America. 2009. Wall Street Reform and Consumer
Protection Act of 2009 (H.R. 4173), passed December 11, 2009.
Karolyi, G. 2009. Discussion of a lobbying approach to evaluating the Sarbanes-Oxley Act of 2002.
Journal of Accounting Research 47 (2): 585–95.
Kim, M., and J. Ritter. 1999. Valuing IPOs. Journal of Financial Economics 53 (3): 409–37.
Krishnan, J., D. Rama, and Y. Zhang. 2008. Cost to comply with SOX Section 404. Auditing: A
Journal of Practice & Theory 27 (1): 169–86.
Leuz, C. 2007. Was the Sarbanes-Oxley Act of 2002 really this costly? A discussion of evidence from
event returns and going-private decisions. Journal of Accounting Economics 44 (1): 146–65.
Lowry, M. 2003. Why does IPO volume fluctuate so much? Journal of Financial Economics 67 (1):
3–40.
Officer, M. S. 2007. The price of corporate liquidity: Acquisition discounts for unlisted targets. Jour-
nal of Financial Economics 83 (3): 571–98.
Pagano, M., and F. Panetta. 1998. Why do companies go public? An empirical analysis. The Journal
of Finance 53 (1): 27–64.
Pagano, M., and A. Roell. 1998. The choice of stock ownership structure: Agency costs, monitoring,
and the decision to go public. The Quarterly Journal of Economics 113 (1): 187–225.
Peters, M., J. Koh, and K. Belisle. 2005. Private companies toe the SOX line. Mergers and Acquisi-
tions 40 : 34–36.
Piotroski, J., and S. Srinivasan. 2008. Regulation and bonding: The Sarbanes-Oxley Act and the
flow of international listings. Journal of Accounting Research 46 (2): 383–425.
Poulsen, A., and M. Stegemoller. 2008. Moving from private to public ownership: Selling out to
public firms versus initial public offerings. Financial Management 37 (1): 81–101.
PricewaterhouseCoopers. 2005. 30% of fast-growth private companies applying Sarbanes-Oxley princi-
ple. Available online at http://www.barometersurveys.com/vwAllNewsByDocID/
834B5ECEF36C79C685257026006F2DC7/index.html, retrieved June 11, 2013.
Rajan, R., and J. Wulf. 2006. Are perks purely managerial excess? Journal of Financial Economics 79
(1): 1–33.
Ritter, J. 1987. The costs of going public. Journal of Financial Economics 19 (2): 269–81.
Solomon, D. 2005. At what price? Critics say the cost of complying with Sarbanes-Oxley is a lot
higher than it should be. Wall Street Journal, October 17.
Willenborg, M. 1999. Empirical analysis of the economic demand for auditing in the initial public
offerings market. Journal of Accounting Research 37 (1): 225–38.

Copyright of Contemporary Accounting Research is the property of Canadian Academic
Accounting Association and its content may not be copied or emailed to multiple sites or
posted to a listserv without the copyright holder's express written permission. However, users
may print, download, or email articles for individual use.

The Sarbanes-Oxley Act and Exit Strategies of Private Firms PDF

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

The Sarbanes-Oxley Act and Exit Strategies of Private Firms PDF

Uploaded by

Copyright:

Available Formats

The Sarbanes-Oxley Act and Exit Strategies of Private Firms*

FRANCESCO BOVA, University of Toronto

MIGUEL MINUTTI-MEZA, University of Miami

GORDON RICHARDSON, University of Toronto

DUSHYANTKUMAR VYAS, University of Toronto

CAR Vol. 31 No. 3 (Fall 2014)

CAR Vol. 31 No. 3 (Fall 2014)

CAR Vol. 31 No. 3 (Fall 2014)

HYPOTHESIS 1. Private firms have an increased propensity to choose being acquired by a

Continuing to focus on the distribution of private company exit strategies, we addi-

CAR Vol. 31 No. 3 (Fall 2014)

CAR Vol. 31 No. 3 (Fall 2014)

Acquisition deal multiple tests

CAR Vol. 31 No. 3 (Fall 2014)

CAR Vol. 31 No. 3 (Fall 2014)

SALES=EV ¼ a0 þ b1 COMPi þ b2 SIZEi þ b3 GROWTH þ b4 MARGIN

CAR Vol. 31 No. 3 (Fall 2014)

CAR Vol. 31 No. 3 (Fall 2014)

ICWi;t ¼ 2:8634 0:030 SIZEi;t 0:0001 MARGINi;t 0:0001 SALES GRi;t

CAR Vol. 31 No. 3 (Fall 2014)

CAR Vol. 31 No. 3 (Fall 2014)

Panel A: U.S. IPO sample

IPO ﬁrms, pre-SOX sample IPO ﬁrms, post-SOX sample

Variable N Mean Median S.D. N Mean Median S.D.

SIZE 2,328 17.19 17.20 2.15 407 18.61 18.73 1.92

Panel B: U.K. IPO sample

IPO ﬁrms, pre-SOX sample IPO ﬁrms, post-SOX sample

Variable N Mean Median S.D. N Mean Median S.D.

SIZE 953 1.00 1.00 0.00 313 1.00 1.00 0.00

Takeover ﬁrms, pre-SOX sample Takeover ﬁrms, post-SOX sample

Variable N Mean Median S.D. N Mean Median S.D.

SALES/EV 480 1.46 0.92 2.00 523 1.13 0.75 1.40

CAR Vol. 31 No. 3 (Fall 2014)

Panel C: U.S. takeover sample, public acquisition of private targets

Takeover ﬁrms, pre-SOX sample Takeover ﬁrms, post-SOX sample

Variable N Mean Median S.D. N Mean Median S.D.

SIZE 480 16.51 16.50 1.61 523 16.77 16.80 1.79

Takeover ﬁrms, pre-SOX sample Takeover ﬁrms, post-SOX sample

Variable N Mean Median S.D. N Mean Median S.D.

SALES/EV 139 1.92 1.32 2.15 110 2.06 1.10 3.21

CAR Vol. 31 No. 3 (Fall 2014)

(The table is continued on the next page.)

CAR Vol. 31 No. 3 (Fall 2014)

v2-Test: Column (2) SOX * SIZE_LARGE = SOX * SIZE_SMALL p-value = 0.0108.

Marginal eﬀects for variables of interest

Variable dy/dx Std. Err. z P >z

CAR Vol. 31 No. 3 (Fall 2014)

CAR Vol. 31 No. 3 (Fall 2014)

(1) (2) (3) (4)

CAR Vol. 31 No. 3 (Fall 2014)

(1) (2) (3) (4)

SMB2 1.482 1.515 0.005 0.007

Marginal eﬀects for variables of interest

Variable dy/dx Std. err. z P>z

Table 3, Column (1) SOX 0.047 0.034 1.39 0.164

CAR Vol. 31 No. 3 (Fall 2014)

Panel A: SIZE used as proxy for SOX compliance

(1) (2) (3)

SOX * LARGE 0.352***

Panel B: BIG4 used as proxy for SOX compliance

(1) (2) (3)

SOX * BIG4 0.510***

CAR Vol. 31 No. 3 (Fall 2014)

MARGIN 1.543* 1.742* 1.293***

MARGIN 0.318 0.360 0.163

% Diﬀerence 21.4%*** 1.61%* 0.95%* 6.91%* 11.88%***