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The stereotype is that Democrats are less open to the concerns of American business than are Republicans. The surprising — indeed, encouraging — reality is that the new Democratic majority in Congress may be ready to relax some new corporate regulations that have proved too burdensome. Before changes were announced two weeks ago, Rep. Barney Frank (D-Mass.), the incoming chairman of the House Financial Services Committee, had met with leaders of the Securities and Exchange Commission to urge them to relax the costly audit rule prescribed by the Sarbanes-Oxley Act of 2002. Frank has also committed to holding hearings on a Nov. 30 report by the independent, bipartisan Committee on Capital Markets Regulation and has expressed agreement with some of its recommendations, which are intended to improve the regulatory system and give U.S. capital markets a competitive boost. Sen. Christopher Dodd (D-Conn.), the incoming chairman of the Senate Banking Committee, has also endorsed relaxing the costly audit rule and has committed to considering the proposals by the committee of private experts. There are two primary reasons for this unusual Democratic interest in reducing the costs of regulating U.S. corporations: The developing evidence on the costs of these onerous regulations is now quite compelling. And many of these costs are borne by residents of the Northeastern states, where the financial industry is concentrated — states now represented in Congress almost entirely by Democrats. Here are some of the hard numbers: • The average listing premium, the benefit that companies receive by listing their shares on U.S. stock exchanges, has declined by 19 percent since 2002.

• Only 5 percent of worldwide initial public offerings were on U.S. exchanges in 2005, down from 50 percent in 2000. • More than a quarter of the publicly announced takeovers in the United States since 2003 involved public companies going private. • Private equity transactions, which avoid the regulations specific to public corporations, totaled $200 billion in 2005, compared to a minimal amount 25 years ago. • The Securities Industry Association estimates that the total cost of complying with SEC regulations is now about $25 billion a year, and the London Stock Exchange estimates that underwriting costs in the United States are now about twice those in Great Britain.

Two other reports to be released soon — one by the U.S. Chamber of Commerce and one commissioned by Sen. Charles Schumer (D-N.Y.) and Michael Bloomberg, the Republican mayor of New York City — are expected to add to this documentation of a hostile business climate. MORE COSTS Moreover, the evidence that U.S. securities regulation is hurting U.S. business does not end with these more easily observed measures. The primary case made for Sarbanes-Oxley was that it was necessary to restore investor confidence in securities listed on U.S. exchanges by improving the accuracy of reported earnings. If that is true, you would expect that investors would be willing to pay higher prices for stocks with more accurately reported earnings. In fact, however, the price-earnings ratio on the Standard & Poor’s 500 stock index has dropped continuously since the spring of 2002, when Sarbanes-Oxley was being drafted. The loss in the market value of stocks per dollar of reported earnings since early 2002 overwhelms the other reported costs of Sarbanes-Oxley. This evidence is strongly contrary to the assertion that the statute has increased investor confidence. Another type of cost may be even more important but is too early to document: Recent financial regulations and the increased civil and criminal penalties for accounting errors may make senior corporate managers too risk-averse. Most CEOs are not certified public accountants and have no special skills to evaluate the accounts and audits of their companies. The Sarbanes-Oxley requirement that they personally affirm these accounts at the risk of a high penalty is, first, a misuse of their time and, second, a deterrent to aggressive business strategies. Given this record, one should not be surprised that senior congressional Democrats appear to be willing to consider a significant reduction of the corporate regulations that they authorized only a few years ago.
William A. Niskanen is the chairman of the Cato Institute, a libertarian policy institute in Washington, D.C. He is also a former acting chairman of the Council of Economic Advisers during the Reagan administration, as well as the contributing editor of After Enron: Lessons for Public Policy (2005).

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