Bus 102
Sec 022

Market failure, information asymmetry, the case for regulation

The Sarbanes-Oxley Act of 2002 was approved by the Congress after some big events of corporate scandals. Many big name companies like Enron,WorldCom and Tyco were involved in unethical activities as a result of a market failure. SOX stands for Sarbanes-Oxley Action, is a United States federal law that set expanded requirements for all U.S. public company and public accounting firms. The idea of SOX are largely adopted by big companies. If fact, many large public companies were required to meet the standard conditions of the SOX or they will face severe penalties. Ethical corporate government plays an important role in the concept of market failure. The author uses the example from Aristotle and Adam Smith to address the historical and philosophical context of the market failure problem. He examine the issue and proves that the measures of SOX is largely attributed to corporate bad behavior. The article is intended to provide readers a better understanding of the connection between corporation and our government. Sarbanes-Oxley proves to be an effective legislation that help to protect the investor from company fraud and help executives to improve ethical standards. Most importantly, it helps to reinforce the strength of the US market and make it a good place to work and invest.
According to the author, people usually look for solutions from the market because market offers ownership of the factors of production. This ownership attracts capitalist to fulfill his independence and wealth maximization. Author uses an example of an life experience from Adam Smith to further support his idea that the institutions of commerce provides oversight on the stabilization for our modern market. In the section ďA framework for corporate bad behaviorĒ, many corporate executive let money and profitability obscure their ethical rules. In order to fully understand the nature of the problem of bad behavior and the idea of Sarbanes-Oxley, we have to examine the theoretical context of the problem. In economics, market failure is a situation where the allocation of goods and services in not efficient. There are many ways that can lead to market failure. One of the externalities is information deficits, it enable competitive failures and is categorized simply as lying,cheating and stealing. Weimer and Vining thinks that information problem are the centerpiece for Sarbanes-Oxley. From the historical aspect of SOX, big companies usually have fraud cases where they have involved in biased media. SOX is a tax-like cost same as pollution control, serve to help the community by increasing investorís confidence through transparency and also helps to discipline those executive from doing fraudulent behavior. SOX are compelled to innovate their systems and utilize their resources in order to cut costs. Some of the key component includes auditor independence, corporate responsibility, and enhance financial disclosures.
In conclusion, the author uses methodological approaches to the question regarding how the concept of market failure is closely related to ethical corporate governance. The author also discuss the importance of information asymmetry by stating that sometimes in one transaction, one party has more or better information than the other party, this phenomenon creates an imbalance of power in transaction and lead to market failure. Based on authorís finding and the examples he provides, we can conclude that SOX is a good legislation that helps to prevent bad corporate behavior. Moreover, SOX will most likely become part of the long term corporate culture and serve as the standard criteria for investors of American and global commerce.