The Effects of the Sarbanes-Oxley Act of 2002 on Acquisition Due Diligence

Abstract

This paper studies whether, and how, due diligence was affected by the Sarbanes-Oxley Act (SOX) of 2002. Due to the lack of data availability, a study of this nature has been long suggested but never approached. Using a number of different proxies for due diligence expenditure of public bidders acquiring both public and private targets, we evaluate trends in these costs and whether they were significantly impacted by the enactment of SOX. Additionally, we investigate whether the delay between the announcement and closing of an acquisition significantly affects the probability of success and whether this measure (duration) was affected by SOX-induced increased due diligence. Our results suggest that the legislation allowed bidding firms to conduct less due diligence, rather than more; secondly, while shown to be a significant predictor of merger success, the average duration of an acquisition was not affected by the passage of the Act. The significance of SOX impact suggests that business reform has yielded positive corporate consequences in the past, and could again in the future. With the ongoing battle to effect the many provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the study of legislation as similar as to Dodd-Frank as Sarbanes-Oxley could aid legislators and investors alike in their search for assurance.