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Sarbanes Oxley's impact upon investor‐relevant risk types

Nicholas V. Vakkur (TUI University, Venice, California, USA)
Zulma J. Herrera (Herrera‐Vakkur Consulting, Venice, California, USA)

Journal of Financial Regulation and Compliance

ISSN: 1358-1988

Article publication date: 26 July 2011



The purpose of this study is to empirically analyze, with a greater degree of accuracy than is currently presented in the literature, the comprehensive risk impact of the Sarbanes Oxley Act of 2002. Research to date is based upon a series of simple mean‐variance analyses and is therefore unreliable.


Rigorous statistical methodology to include a highly representative dataset, difference‐in‐difference analysis, comprehensive controls, and fixed effects (firm as well as longitudinal). As a reliability check, the authors also employ several pre‐ and post‐tests.


In support of Bargeron et al., the authors find that the Sarbanes Oxley Act of 2002 significantly reduced firm risk. In particular, the law reduced firms' risk‐adjusted returns as well as “upside” risk. This is not a mere repeat of prior research, but a detailed analysis of the law's risk impact.

Research limitations/implications

As a study of corporate risk, there are inherent limitations, as contained in every study of this type. First, the authors are unable to account for every single factor that might influence firm risk. However, their methodology represents a significant improvement over the current literature, and therefore produces more comprehensive, detailed, and reliable findings.

Practical implications

The main practical implication is that Sarbanes Oxley, the most important and comprehensive US financial regulation since the New Deal, reduced firm (equity) risk. This represents a finding of enormous importance: comprehensive accounting regulation was never intended to alter firm risk, yet this study strongly suggests that it has in two specific ways.

Social implications

As a result of this study, the cost to investors – the “social” cost – of this important regulation can now be analyzed more conclusively. In particular, the authors suggest Sarbanes Oxley reduced “upside” risk as well as firms' risk‐adjusted returns. This is of enormous potential importance to investors of all types.


This study is original and hence important in several ways: the dataset is arguably an improvement – in terms of the degree to which it is representative of the US economy – over Bargeron et al., the most conclusive study of its type to date; the methods are a significant improvement over the current published studies in the literature; the risk measures analyzed are also entirely distinct and new from prior research in a manner that is important. Prior research, as based upon simple mean‐variance analyses, is unreliable.



Vakkur, N.V. and Herrera, Z.J. (2011), "Sarbanes Oxley's impact upon investor‐relevant risk types", Journal of Financial Regulation and Compliance, Vol. 19 No. 3, pp. 254-270.



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