Has Section 404 of the Sarbanes–Oxley Act Discouraged Corporate Investment? New Evidence from a Natural Experiment
Ana Albuquerque, Julie Lei Zhu
Management Science · 2019 · Volume 65 · Issue 7
Abstract
Prior studies conclude that an unintended consequence of firms complying with the Sarbanes–Oxley Act is lower levels of risk-taking activities, including investment. We first show that prior studies cannot isolate the effects of SOX from other contemporaneous events. We then use the implementation requirements of SOX404 to construct a natural experiment that isolates the effects of SOX404 for a sample of small firms. We do not find a reduction in investment and other risk-taking activities for firms that had to comply with SOX404, relative to other firms. Because small firms are expected to be the most adversely affected by the regulation, our results cast doubt on the notion that SOX404 had a negative impact on larger firms. Data and the online appendix are available at https://doi.org/10.1287/mnsc.2018.3090 . This paper was accepted by Suraj Srinivasan, accounting.
Keywords
SOX, Section 404, corporate investment, risk taking, regulation, natural experiment
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