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This paper aims to examine the effect of the Sarbanes–Oxley Act (SOX), which was signed by President George W. Bush and came into effect on July 30, 2002, on firm productivity.

The authors use the total factor productivity (TFP) as our measure of firm productivity.

Analyzing annual firm-level data from the Compustat database for the period of 1991-2006, the authors find that firm productivity increases at a higher rate in the post-SOX period. The results indicate that, although firms incur significant costs in complying with the requirements of the SOX, they also benefit from these requirements as evidenced by the improved productivity over time post-SOX. There is also a shift in the output elasticities from capital toward labor. The SOX has a positive effect on the output elasticity of labor but a negative impact on that of capital.

The results have the following important implications. The SOX is a value-enhancing regulation in that it not only strengthens a firm’s corporate governance but also improves its productivity. However, compliance with the SOX can impose a long-term cost on firms: the decrease in the capital investment, leading to a decline in the output elasticity of capital. If this decline in the capital investment continues, it can have an adverse effect on firm productivity in the long term.

This paper extends the literature along the line of the actual operational effects of the SOX regulation by examining its effect on the productivity of firms.

Negative disclosure tone in 10-K annual reports has economic consequences, yet relatively little is known about how it is generated. Boards of directors play an important governance role with respect to mandatory disclosures and personally sign off on Form 10-K, leading us to expect directors to influence financial reporting narratives. This study investigates whether the negative tone of firms' narrative annual report disclosures is associated with the human and social capital of its board of directors.

Multivariate regression analyses of negative disclosure tone (Loughran and McDonald, 2011) on board members' average age, gender, education, financial expertise and turnover is performed. A host of supplemental tests to corroborate our primary analysis, including using Sarbanes-Oxley's financial expert mandate as an exogenous shock to board composition, impact threshold for a confounding variable, placebo analysis, portfolio tests of more and less negative disclosing firms and portfolio tests of “loud” versus “quiet” boards are conducted.

Evidence that directors' gender, education, financial expertise and board turnover are associated with more negative disclosure tone, while directors' age is associated with less negative disclosure tone is found. The study also looked within the board to differentiate whether these findings are driven by characteristics of inside directors or outside directors serving on the audit committee, or both, as these are the specific groups of directors we would expect to play a role in disclosure. It was found that negative disclosure tone is associated with a lower bid-ask spread, so this study interpreted more negative tone as containing more descriptive information.

This study helps decode the “black box” of annual report disclosure tone, which Loughran and McDonald (2011) show has important economic implications. The results help inform stakeholders such as policymakers, executives and capital market participants as to how board member traits are associated with disclosure. The findings are particularly important as this study bears witness to the increasing prominence of gender/diversity mandates (e.g. Israel, Norway, California) and financial expertise mandates (e.g. Sarbanes-Oxley).

Many entrepreneurs want to reach high to the heavens to achieve unlimited success. These hardworking, often underappreciated, venturers often crave fame and fortune as they strive to create their personal business legacy. One strategic path many have wandered down is that of the Initial Public Offering (IPO), whereby shares of the company are sold to the public. The IPO has many strong attractions. Large amounts of capital can be brought into the company.The company's stock can be used as currency to acquire other companies. Early investors realize a good ROI. Employees can perceive real value in their stock options. Customers, banks, vendors, and other stakeholders pay more respect to the company. Is this truly the entrepreneurʼs nirvana? Or is it a case of “Be careful of what you wish for because it may really come true?” Read on.

Most entrepreneurs are continually concerned about their finances. Their companies perhaps not yet profitable, they may have a fear of “running out of dry powder.” These entrepreneurs often have fallen in love with their company's technologies, products, and potential markets, but they require more resources. Invariably these emerging ventures shroud their fear of the grueling capital raising marathon by presenting voluminous business plans to potential investors. They often flaunt their “optimized business models.”” Investors, however, typically want to know why the potential investment is such a good deal. The entrepreneur often wants guidance regarding what to say to whom in a changing financing environment.

In this article, our “Practitioner's Corner” associate editor Joe Levangie collaborates with a long-time colleague Paul Broude to address how businesses should “make their capital-raising initiatives happen.” Levangie, a venture advisor and entrepreneur, first worked with Broude, a business and securities attorney, in 1985 when they went to London to pursue financing for an American startup. They successfully survived all-night drafting sessions, late-night clubbing by the company founder, and even skeet shooting and barbequing at the investment banker's country house to achieve the first “Greenfield” flotation by an American company on the Unlisted Securities Market of the London Stock Exchange. To ascertain how the entrepreneur can determine what financing options exist in today's investing climate, read on.

As the influence of institutional investors over managerial decision-making grows, so does the importance of understanding the effect of institutional investor ownership (IO) on firm outcomes. The authors take a comprehensive approach to studying the effect of IO on earnings management (EM).

The authors study the relation between IO and EM using a sample of 59,503 listed U.S. firm-year observations from 1981–2019. The authors proxy EM with earnings surprises and with accrual-based and real activity measures. The authors test for nonlinear relations and analyze changes resulting from the passage of the Sarbanes–Oxley Act.

The findings support a positive IO-EM relation overall, but show that the relation is dynamic and heavily context-dependent with evidence of nonlinearity. The authors also find evidence that IO positively affects accrual-based EM and real activities EM negatively.

To the authors’ knowledge, this is the first study of the IO-EM relation to consider evidence of nonlinearity in the U.S. context, measuring changes to the relation over time, and with the use of several measures of EM.

This paper aims to study the impact of audit quality on the components of executive cash compensation. It is predicted that as audit quality improves, greater emphasis will be placed on the incentive components of cash compensation, and lower emphasis on the salary (fixed) component. Specifically, it is predicted that as audit quality enhances, greater emphasis will be placed on earnings and sales revenues in determining executive cash compensation. Using auditor specialization as a proxy for audit quality, empirical support is provided for all of our predictions.

This paper provides empirical support with agency theoretic predictions.

This paper developed the following hypotheses: H1 – in executive cash compensation, more weight is being placed on earnings-based measures as auditor specialization improves; H2 – in executive cash compensation, more weight is also being placed on sales revenues as auditor specialization improves; H3 – in executive cash compensation, salary levels decrease as auditor specialization improves; and H4 – the impact of auditor specialization on the weight on earnings, sales and the salary levels is lower in the post-Sarbanes–Oxley Act (SOX) period compared to pre-SOX period.

First, the article limits itself to cash compensation, while current executive compensation is largely made of equity. Second, the measure of audit quality used, ‘national level auditor specialization’, may not be as effective in the post-SOX era.

Compensation committees should pay attention to audit quality (in whatever way it may be proxied by) in determining executive compensation.

This is the first paper to show that audit quality not only improves the earnings response coefficient in firm valuation but also enhances the weight placed on earnings (and sales revenues) in executive compensation.

The aim of this paper is to provide additional insights on the association between real earnings management (REM) and crash risk, particularly from the perspective of an emerging market economy. It also examines the moderation role that internal and external corporate governance may play in this area.

Relying on archival data from the RESSET and CSMAR databases over a timeframe from 2010 to 2018 of China listed company, the authors test the hypotheses by regressing common measures of crash risk on the treatment variable (REM) and crash risk control variables identified in the prior crash risk literature. The authors also introduce monitoring proxies (internal controls as an internal governance and institutional ownership as an external governance) and assess how effective internal and external governance moderate the relation between REM and stock price crash risk.

The results suggest firms with higher REM have a significantly greater stock price crash risk, and that this association is mitigated by external monitoring. That is, greater institutional ownership, particularly pressure insensitive owners, mitigates the impact of REM on stock price crash risk. However, internal control does not mitigate the association between REM and stock price crash risk.

Following the passage of the Sarbanes–Oxley (SOX) Act, prior research has documented an increase in the use of REM and a positive association between REM and cash risk. The authors demonstrate that they persist in one of the largest emerging markets where institutional regulations, market conditions and corporate behaviors are different from those in developed markets. Also, the assessment of the moderation effect of internal and external governance mechanisms could have meaningful implications for investors and regulators in Chinese and other emerging markets.

Entrepreneurs tend to be self-styled “idea” people. They often believe they have the next “Big Concept”‐one which could change the world, reaffirm their self-worth, and, of course, make them and their venture team a fortune. In contrast, as they build a company to implement their business dream, entrepreneurs also tend to eschew or trivialize administrative details. Why should they waste their creative juices on minutia? As a result of this insensitivity to detail, these captains of capitalism often trip in their entrepreneurial journey. For example, they might:

1. •

   Forget to remit payroll taxes on schedule.

2. •

   Fail to document the justification underpinning the dismissal of a key employee.

3. •

   Allow the company℉s liability insurance to lapse.

4. •

   Neglect to report sales usage tax.

5. •

   Verbally grant employee incentive stock options during an informal luncheon meeting, at a yet-to-be-determined exercise price and without the board of directors℉ approval.

Forget to remit payroll taxes on schedule.

Fail to document the justification underpinning the dismissal of a key employee.

Allow the company℉s liability insurance to lapse.

Neglect to report sales usage tax.

Verbally grant employee incentive stock options during an informal luncheon meeting, at a yet-to-be-determined exercise price and without the board of directors℉ approval.