he costs of complying with the Sarbanes-Oxley Act of 2002 (SOX) for private firms that are still trying to find an efficient if not profitable exit strategy is the subject of a new study by Francesco Bova and Gordon Richardson (Univ. of Toronto), Miguel Minutti-Meza (Univ. of Miami), and Dushyantkumar Vyas (Univ. of Minnesota). Among its principal findings: First, SOX appears to have shifted the firms’ exit incentive from an IPO to a public acquisition. The costs of SOX compliance may be larger for IPO firms, which need to create SOX infrastructure from scratch, than for acquired firms, which can leverage on their acquirer’s existing SOX infrastructure.

Second, private targets that invest more in pre-acquisition SOX compliance post larger deal multiples. This suggests that pre-sale SOX compliance "bumps up" a target’s valuation multiples due to its predicted lower compliance costs after the acquisition. By the same token, private firms with less SOX compliance may post lower acquisition multiples.

Download a working version of the paper, “The Sarbanes-Oxley Act and Exit Strategies of Private Firms” here.