Market vs. Regulatory Responses to Corporate Fraud: A Critique of the Sarbanes-Oxley Act of 2002

The crashes and frauds of Enron, WorldCom and other companies have reinvigorated the debate over regulating corporate governance. Many pundits have called for corporate regulation to restore confidence in the securities markets. These recommendations appear to be supported by the fact that neither the contracting devices that were supposed to control managers, nor efficient securities markets, worked to prevent or spot the problems. Congress responded with the Sarbanes-Oxley Act of 2002. But this article shows that, given the limited effectiveness of new regulation, its potential costs, and the power of markets to self-correct, new regulation of fraud in general, and Sarbanes-Oxley in particular, is unlikely to do a better job than markets.