Saturday, August 26, 2006

Sarbanes-Oxley

The latest unintended consequence of Sarbanes-Oxley is that hedge funds and economists are saying that, when firms are taken private, the estimated 1.5% extra expenses associated with Sarbanes-Oxley and SEC compliance will go straight to the bottom line. In other words, the centralization of wealth in our society may have reached the point where public equity markets are no longer be the most efficient way to raise capital. To be fair, this trend may be bigger than a single piece of legislation, but it is interesting if the ultimate consequence of Sarbanes-Oxley is to remove genuinely profitable companies from public ownership, leaving the stock markets as a place where dubious enterprises are sold to trusting morons.

If the trend of taking units private continues, the predictive value of historical measures of performance such as Index Funds will highly misleading: management teams will cream off the better performing companies and units, leaving the laggards (at a competitive disadvantage to the private firms) in the indices.

How does the Neapolitan proverb go? If shit were valuable, they'd take away our assholes.

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