Nicole Gelinas responds:

Lord & Benoit's May report, "Do the Benefits of [Sarbanes-Oxley Section] 404 Exceed the Cost?", is the first empirical study to address how the stock market has treated individual companies as they begin to comply with the law.

As Mr. Benoit notes, the study found that over a two-year period, companies that reported insufficient "internal controls" under Sarbanes-Oxley's Section 404 watched their stock prices fall, while companies that reported sufficient controls, or reported insufficient controls in the first year while certifying that they had fixed them the second year, enjoyed large stock increases.

But Wall Street could well be rewarding established companies in compliance with Sarbanes-Oxley for showing that they can jump quickly through regulatory hurdles, regardless of the cost, rather than rewarding them for actually having good internal controls. Moreover, it is not surprising that Wall Street would punish firms that cannot comply with these regulatory requirements, since they may also be more likely to de-list from major exchanges, thus hurting investors' liquidity; that fear may well show up in today's stock price.

Moreover, L&B's study does not consider the costs and benefits incurred by the smallest public companies, those that must comply with Sarbanes-Oxley's 404 starting next year. These companies may experience the largest costs relative to annual revenue and income to comply with Sarbanes-Oxley, and thus may be the firms most easily deterred from listing or remaining listed on a major American stock exchange. Of course, a few of these companies, domestic and international, may be the next Apples or Microsofts, and America will lose if these companies choose to issue their stock elsewhere. Thus, Sarbanes-Oxley may have long-term negative implications for the U.S. capital markets, and the U.S. economy, that this study does not address.