Market Failure, Information Asymmetry & the Case for Regulation

The Sarbanes-Oxley Act (SOX) was presented as a regulatory response to widespread leadership and financial fraud in organizations. This legislation seeks to protect investors, employees, and buyers from possible information asymmetries that may result from withholding information for personal gain. Organizational fraud, in turn, can lead to market failure, which is a critical event for the company. Essay Sarbanes-Oxley – Context & theory: Market failure, information asymmetry & the case for regulation by Sean D. Jasso (2009) presents a comprehensive analysis of the impact of SOX on related industries. The main lesson that the author illustrates in this essay is that the benefits of such regulations outweigh their costs.

In particular, Jasso (2009) emphasizes that SOX, as a measure of limiting organizational fraud, increases the transparency of organizations’ operations. In turn, this leads to better communication within the company, as well as with investors and customers. Additionally, within the industry, SOX encourages companies to adopt ethical codes that form the foundations of good behavior to maintain a company’s performance. Finally, such legislation contributes to improving the quality of services by making the reporting and control system more complex.

Central Pillars

The first major learning outcome presented in the essay is that the bad behavior of a company’s executives may be the reason for its market failure. In particular, Jasso (2009) clarifies that “market failure is described as the pursuit of private interest… that does not lead to an efficient use of society’s resources” (p. 5). More specifically, the desire for personal gain can often lead members of the organization to seek to defraud both the customer and other members of the company.

In the long term, this behavior can lead to the depletion of the organization’s resources and ultimately to its failure. Interestingly, in the absence of regulatory constraints, members of organizations use all sorts of ways to engage in fraud and gain personal gain, as illustrated by the case of the Glass-Steagall Act. Executives’ tendency to cheat is not due to their bad personalities but due to unethical behavior that does not meet legal resistance.

Additionally, information deficit can lead to loss of competitive advantage and subsequent failure, which is related to external factors. However, in the context of corporate fraud, such a lack of information stems from “lying, cheating, and stealing” (Jasso, 2009, p. 5). Thus, information asymmetry can arise, which leads to misinformation on one of the parties. For example, when trading a particular product, the seller and the buyer may have different information about its characteristics and quality, which undermines the relationships. Companies need legislation that can protect investors from the potential consequences of misbehaving executives. The most important aspect in this regard is that the state as a regulator can provide such instruments in the form of, for example, SOX.

The second major learning outcome presented in the essay is that laws such as SOX have a positive impact not only on customers but also on the industry in the long term. One respondent notes that “transparency is key… frequent and candid communication… good process of [expediting] issues and problems through both the business and financial stream” (Jasso, 2009, p. 10). In addition, it is emphasized that compliance with these regulations ensures more informed decisions and better business judgments. Thus, SOX influences not only aspects of the relationship between the buyer and the seller, but in general, forms communication within the company.

Such fraud-limiting regulations allow the board to obtain complete information from the executives, which is more difficult to falsify. As a result, the leadership of the organization is able to make the necessary decisions in time and identify critical situations.

With regard to corporate fraud, this factor reveals another significant consequence of bad behavior. In particular, the executive’s desire to falsify information in his personal interests leads to disruption of communication within the company when decision-making bodies do not receive sufficient information about the current situation of the company. In the long term, this information asymmetry harms the entire structure, preventing the organization from responding to threats at the right time. It is important that ethical codes in the presence of such regulations are difficult to ignore, and the company is forced to implement and develop them.

This practice generally leads to a positive ethical tradition in the industry and reduces fraud in the long term. Legislation such as SOX creates a habit in organizations of constant communication with both customers, employees, and investors, which significantly increases the transparency of operations.

The third major learning outcome despite the service of procedures, as well as additional costs, regulations as SOX have a positive effect on the quality of services provided by organizations. One of the respondents replied that for accounting companies, SOX has an advantage in the form of more structured and detailed documentation (Jasso, 2009). Thus, during the audit, there are no difficulties with access to information since all operations are recorded and provided in the required form. In general, this is presumably true for all affected industries, as such legislation requires transparent reporting and a standardized reporting system.

Additionally, it is noted that when compliance with the requirements of the legislation requires companies not only additional procedures but also training of employees (Jasso, 2009). This circumstance potentially increases the competitive advantage of the company and the quality of the services provided.

The costs associated with SOX implementation can be significant for companies, which also encourages them to restructure their operations. In particular, compliance with such legislation requires organizations to optimize resources and the workforce. In this respect, this can also be a positive factor since the company once again adapts and transforms the system for more efficient functioning. Additional revision of the organization’s operations is always positive in order to adapt to changing conditions. Thus, such legislation can have a long-term positive effect on the development of the company and maintain a competitive advantage. Overall, SOX encourages organizations to be more efficient and transparent, which also drives them to improve their services and products.


The presented essay has a certain value for the future manager as it emphasizes the importance of maintaining ethical standards for the long-term well-being of the company. In particular, it is emphasized that investing in more transparent business procedures has a positive impact on relationships within the company and in the industry. Compliance with ethical standards also enables better-informed decision-making. This factor is critical to ensure the stability of the company in the face of changing market conditions. Thus, the costs of developing and maintaining standards of good behavior can be critical to the development of a company. In particular, they can greatly shape the relationship between the organization and the customers.


Jasso, S. D. (2009). Sarbanes-Oxley – Context & theory: Market failure, information asymmetry & the case for regulation. Journal of Academy of Business and Economics, 9(3), 1-13.

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