Another Delisting — The Cost of Sarbanes-Oxley
I know why Sarbanes-Oxley [SOX] came into existence: to give one of America’s least productive Senators a fitting legacy. I think the legislation was perhaps well-intended, but on the whole, it has perhaps imposed more costs than produced benefits. Today I am faced with one of the costs: Lafarge SA has delisted, and now trades on the pink sheets. Now, big institutional investors will buy and sell shares of this fine firm on the Paris bourse, but I’m not big, so I end up with an illiquid nonsponsored ADR. This is the third time this has happened to me since the passage of SOX, because my investing travels the world in a cheap way, through ADRs.
It has been said in many ways, but I will summarize it in this way: there is price, quantity, and quality. You can at most regulate two out of three, and usually, it’s not wise for a government to regulate more than one variable at a time. Often, it is wisest not to regulate, unless there are material problems in quality that ordinary people cannot verify, and yet ordinary people have a common need for (think of food safety, and our government does well at that, but could do better).
Large companies are complex, and the accounting is more so. The personal burdens placed on the CEO and CFO are misplaced, in my opinion, and the degree of auditing/testing prior to SOX was adequate to catch most abusive situations. Are financial statements higher quality now? Yes, but at a cost: Higher accounting costs, particularly for smaller firms, more firms going private, and fewer foreign firms listed in the US. (Note to those pushing for unification of GAAP and IFRS. If you’re trying to get more listings in the US, it would be better to aim for reform of SOX. If GAAP and IFRS are the same, and I were a medium-sized US firm, maybe I would list in London.)
There is a logical balancing point to regulation, and SOX tipped the balance, imposing more costs than the value of improvements in quality.
Full disclosure: long LFRGY (not LR 
)
September 24th, 20074:21 pm at
Scott Rothbort (on Real Money) has some interesting commentary regarding investment bank risk management and some observations from LTCM; David; as a bond/trading desk professional I hope you have time to add your thoughts. Also; with the trend for delisting is it time for the retail investor to make sure they own positions held on other exchanges?? I’ve tried to get that through my firm’s BD (no luck so far).
September 24th, 20078:27 pm at
Lafarge’s press release seemed to claim the reason for delisting was low volume (and presumably therefore not worth the cost): http://today.reuters.com/news/articleinvesting.aspx?view=PR&symbol=LR&storyID=64952+02-Aug-2007+BW&type=qcna
Creative Labs (formerly CREAF) was another recent voluntary delisting (similarly, had much higher volume on the Singapore exchange), and much lower volume on the U.S. exchange than LR.
A recent post to this blog addressed, tangentially, the plusses and minuses of being an individual value investor. In that context, I’d like to add the counterbalancing note that, in my experience, the risk of fraud used to be far and away the greatest single source of risk/losses in deep value stocks (usually, if one was patient, they were winners eventually except when they were frauds), and it seems to me that this risk has diminished significantly in recent years.