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This study seeks to evaluate, in a global context, the impact of Sarbanes Oxley Act on a particular risk measure of importance to investors (risk‐adjusted returns), and…
This study seeks to evaluate, in a global context, the impact of Sarbanes Oxley Act on a particular risk measure of importance to investors (risk‐adjusted returns), and two measures of risk due to asymmetry (upside and downside risk). A unique dataset permits a dual evaluation of the law's impact on such measures in leading non‐US economies as well (i.e. “ripple effects”).
Hypotheses are empirically evaluated on a sample (n=712) of the largest US and European firms (control) using daily return data from 1993 through 2009 – one of the most extensive data sets employed in the literature on this topic to date. The reliability of the risk measures is carefully evaluated using multiple approaches, including Fama‐MacBeth regressions. A series of difference‐in‐difference analyses is then employed to empirically assess Sarbanes Oxley's impact on equity risk.
The findings suggest Sarbanes Oxley decreased both risk‐adjusted returns and upside risk, whereas downside risk fails to explain the cross section of returns for the largest US firms. From a global perspective, it is suggested that the enactment of Sarbanes Oxley's in the USA motivated leading non‐US economies to adopt similar regulatory measures, which caused “ripple effects” – e.g. effects similar to those documented in this paper – in leading non‐US economies.
The findings suggest that comprehensive financial regulations, such as Sarbanes Oxley Act, are properly envisaged at the global level, as their impact is not confined to the home country. In an increasingly globalized economy, investor welfare is likely to be influenced – directly as well as indirectly – by economic and financial regulation(s) enacted in foreign economies. Arguably, this suggests the pivotal importance of effective mechanisms of global governance, such that a purely domestic approach to regulation may be short‐sighted. In either case, the findings of this study are entirely relevant if regulators are to consider the broader, global impact of regulation on investor welfare.
This is the first study to empirically analyze, within a global framework, Sarbanes Oxley's risk implications without relying on a series of simple mean variance analyses. Substantive research documents that the methodological approach employed is more precise, reliable as well as “investor relevant”. Furthermore, the authors seek to assess the law's impact on leading non‐US equity markets, a first for the literature. Consequently, this study provides a robust evaluation of the law's (international) impact on firm (equity) risk, making an important contribution to the literature.
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…
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.
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.
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.
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.