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Article
Publication date: 19 August 2009

W. Scott Sherman and Valrie Chambers

Corporate scandals at Enron, Tyco, and MCI highlight the issue of opportunistic management behavior. The US Congress responded to these scandals by passing the…

Abstract

Corporate scandals at Enron, Tyco, and MCI highlight the issue of opportunistic management behavior. The US Congress responded to these scandals by passing the Sarbanes‐Oxley Act of 2002 (SOX). SOX imposes additional management responsibilities and corporate operating costs on companies trading under SEC regulations. This paper examines three options for US corporations responding to SOX: compliance with SOX, taking a company private, or moving to a non‐ SEC‐regulated exchange, such as an international exchange. The paper then examines potential corporate governance options using Transaction Cost Economics (TCE; Williamson 1985) to develop propositions regarding which options firms may select.

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Multinational Business Review, vol. 17 no. 3
Type: Research Article
ISSN: 1525-383X

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Article
Publication date: 29 April 2014

Erastus Karanja and Jigish Zaveri

In most firms, accounting and financial information and reporting systems are either incorporated or embedded in computer-based information systems (IS). Despite the…

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Abstract

Purpose

In most firms, accounting and financial information and reporting systems are either incorporated or embedded in computer-based information systems (IS). Despite the important roles that these computer-based IS play in facilitating the SOX Act compliance initiatives, the act is silent on the roles of the CIOs, although it does stipulate specific functions for the CEOs, CFOs, and the auditors. Based on a detailed analysis of the extant literature, this article argues that IT units, under the leadership of the CIOs, contribute significantly in the procurement, design, implementation, and the governance of these computer-based IS. The paper aims to discuss these issues.

Design/methodology/approach

The researchers generate and empirically test hypotheses using a panel data set obtained from press releases issued by firms following the hiring of CIOs between 1999 and 2005.

Findings

The results reveal that, after the enactment of the SOX Act in 2002, many firms hired new CIOs in the post-SOX Act period. Also, many of these executives were hired to fill newly created Chief information officer (CIO) positions. The results support the argument that the SOX Act has influenced the roles of senior IT executives and IT governance.

Research limitations/implications

Although this study focused on hiring trends, there are other characteristics associated with CIOs that might have an impact on corporate IT governance. Future studies could investigate whether or not, for instance, firms reported fewer IT material weaknesses before or after the hire of the CIOs.

Originality/value

This research presents the argument and detailed discussion that while the SOX Act does not explicitly require the CIOs to sign off on the accounting/financial statements and reports, their role is fundamental in making the firm meet the SOX Act compliance standards.

Details

International Journal of Accounting and Information Management, vol. 22 no. 2
Type: Research Article
ISSN: 1834-7649

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Article
Publication date: 2 September 2019

Gurmeet S. Bhabra and Jacob Rooney

The purpose of this paper is to examine the relationship between the strength of corporate governance and the value of firm-level investment policies following the passage…

Abstract

Purpose

The purpose of this paper is to examine the relationship between the strength of corporate governance and the value of firm-level investment policies following the passage of the Sarbanes–Oxley (SOX) Act of 2002 and the associated changes to the listing requirements of major stock exchanges. In particular the authors seek to examine potential changes in the market’s assessed value of capital expenditures after the passage of the SOX Act relative to before.

Design/methodology/approach

The authors employ a difference-in-difference methodology, centred on the year of the passage of the SOX Act to test for the role of governance on the marginal value of capital expenditures. Excess stock returns are calculated by subtracting Fama and French (1993) size and book-to-market portfolio value-weighted returns from the firms’ annual stock returns. Each firm is grouped into one of 25 size and book-to-market portfolios for each year in the sample, with size and the book-to-market ratio proxying for sensitivity to common risk factors in stock returns (Fama and French, 1993).

Findings

The authors find that markets responded to the change in governance brought about by the new regulation by altering the value of firm-level capital expenditures in a way that is generally consistent with predictions of agency theory. While the overall findings imply a reduction in agency conflicts post-SOX, there is some evidence that certain firms may have suffered excessive costs of compliance, while still others saw managers become excessively risk averse.

Research limitations/implications

The study has implications related to the efficacy of legislation. Cross-sectional variation in the effect of SOX on the marginal value of capital expenditures suggests that one-size-fits-all legislative approach can have both expected as well as unintended consequences. The study limits its analysis to examining the impact of three significant provisions of the Act. While, the value implications of the Act are largely captured by the selected three, a more comprehensive study could expand on the set of provisions studies to obtain a more granular level impact.

Practical implications

This research should add to the growing body of the literature examining the effect of SOX on firms’ real activities and decisions, as well as contribute to the debate on whether the Act was beneficial or costly to firms. With particular reference to the impact of capital expenditure on firm value, the research contributes to the sparse literature examining the contribution of capital expenditures to firm value and the role that agency conflicts play in this relationship. Additionally, this research adds to the growing body of the literature that examines the costs and benefits of the sweeping new regulations brought on by the adoption of SOX.

Social implications

Given the importance of investment policy for economic productivity and growth, the insights provided by findings in this research should benefit lawmakers both within the USA as well as in countries where corporate misconduct and fraud is a concern.

Originality/value

This is the first study that examines the impact of the SOX Act on the way capital markets value firm-level investment in capital expenditures. Since use of corporate resources by managers is fraught with agency conflicts, the role of SOX in potentially alleviating this conflict as revealed by the tests in this study are very valuable.

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Managerial Finance, vol. 46 no. 2
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 3 April 2020

Mostafa Harakeh, Ghida Matar and Nagham Sayour

The literature of financial economics documents a causal relationship between the level of information asymmetry in the firm and its dividend policy. Nevertheless, this…

Abstract

Purpose

The literature of financial economics documents a causal relationship between the level of information asymmetry in the firm and its dividend policy. Nevertheless, this relationship suffers endogeneity problems arising from reverse causality and omitted variable bias. The purpose of this study is to examine how the dividend policy reacts to changes in asymmetric information in an exogenous research setting.

Design/methodology/approach

To overcome endogeneity concerns, the authors employ the enactment of the Sarbanes-Oxley Act (SOX) in the US in 2002 as a source of an exogenous variation in the level of information asymmetry to study the potential effect that this variation might have on the dividend policy. In doing so, we utilize a difference-in-differences research design, in which the treatment group is US publicly traded firms that were exposed to the policy and the control group is publicly traded companies in the UK where SOX was not enacted. Both countries have similar institutional settings and enforcement of laws, which makes them comparable in this research context.

Findings

The authors’ findings show that, compared to UK companies, US firms increase their dividend payments following a reduction in asymmetric information as a result of the SOX enactment.

Originality/value

The study contributes to the literature of financial economics by showing that policy makers can mitigate agency conflicts and protect shareholders by improving the corporate information environment and reducing asymmetric information.

Details

Journal of Economic Studies, vol. 47 no. 6
Type: Research Article
ISSN: 0144-3585

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Book part
Publication date: 17 July 2015

Eunsup Daniel Shim and Euijoo Kim

This paper investigates the impact of the Sarbanes-Oxley (SOX) Act on top executive compensation and empirically examines the changes in relationship between top executive…

Abstract

Purpose

This paper investigates the impact of the Sarbanes-Oxley (SOX) Act on top executive compensation and empirically examines the changes in relationship between top executive compensation and corporate performance expectations.

Methodology/approach

A theoretical framework is presented based on previous literature and testable hypotheses are proposed. The Pearson correlation is calculated to examine the inter-correlation among various measures of performance and compensation variables. The Ordinary Least Square (OLS) Regression was conducted to test the hypotheses.

Findings

The results show that in the pre-SOX period CEO compensation is strongly related to market-based performance measures while in the post-SOX period accounting-based performance measures showed a significant positive relationship with CEO compensation. The results confirm the impact of the SOX Act where it requires stronger internal control systems and reliable financial reporting. The board relies heavily on accounting-based performance measures in determining top executive compensation in the post-SOX period.

Originality/value

This paper shows the composition and level of CEO compensation have changed following the SOX Act and provide important evidence in explaining changes in the relationship between top executive compensation and firm performance expectation in the post-SOX period.

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Article
Publication date: 4 September 2009

Stuart Michelson, Jud Stryker and Betty Thorne

The purpose of this paper is to explore the impact of the Sarbanes‐Oxley (SOX) Act of 2002 on small corporations when compared to large firms and to investigate…

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Abstract

Purpose

The purpose of this paper is to explore the impact of the Sarbanes‐Oxley (SOX) Act of 2002 on small corporations when compared to large firms and to investigate differences perceived by small and large firms with respect to costs and internal controls.

Design/methodology/approach

A questionnaire containing 20 questions (five demographic and 15 addressing issues related to SOX implementation) was mailed to 5,479 board members, chief executive officers (CEOs) and chief financial officers (CFOs) of 676 separate firms with 117 completed surveys returned.

Findings

The results of the study show significant differences in the responses between small and large firms concerning: the overall impact of SOX on the firm; the amount of time dedicated to SOX; the role of the external auditor; the firm's implementation stage; the most significant challenges due to SOX implementation; the corporate governance reforms instituted; and changes in board compensation.

Research limitations/implications

The basic limitation of this paper is the low‐response rate (slightly more than 2 per cent) which is not surprising since CEOs, CFOs, and board of directors have a low tendency to respond to surveys.

Originality/value

The findings of this paper suggest that: recent actions taken by the Securities and Exchange Commission (SEC) are appropriate in providing much needed relief for smaller public firms; and lend support for further actions of assistance by the SEC. This paper is of value to academicians, practitioners and to an international audience engaged in the harmonization of accounting standards.

Details

Managerial Auditing Journal, vol. 24 no. 8
Type: Research Article
ISSN: 0268-6902

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Article
Publication date: 7 July 2014

Julie Harrison and Mark Keating

This paper aims to examine the nature of Sarbanes-Oxley (SOX) costs incurred by subsidiaries of USA parent companies, and considers whether any value flows to non-USA…

Abstract

Purpose

This paper aims to examine the nature of Sarbanes-Oxley (SOX) costs incurred by subsidiaries of USA parent companies, and considers whether any value flows to non-USA subsidiaries. Deductibility is analysed under both the general deductibility provisions and the transfer pricing regimes of Australia and New Zealand (NZ). Reference is also made to the Organisation for Economic Cooperation and Development (OECD) transfer pricing guidelines and the US transfer pricing regulations. Australasian and New Zealand subsidiaries of US parent companies frequently incur costs related to their parent’s regulatory reporting requirements under the Sarbanes-Oxley Act of 2002. Tax authorities, generally, view these costs as “shareholder activities”, i.e. activities performed for the benefit of the parent only. As such, they are considered non-deductible to the subsidiaries of USA parents because an independent party dealing at arm’s length would not pay to receive similar services. We consider circumstances in which some costs may be deductible.

Design/methodology/approach

Legal analysis.

Findings

We conclude that there can be circumstances where these so-called shareholder activities do provide value to subsidiaries and, accordingly, may (or should) be deductible in the local jurisdiction.

Research limitations/implications

This analysis is limited to a consideration of Australian, NZ, OECD and US sources.

Practical implications

This paper provides an analysis of the deductibility of a type of expenditure commonly encountered by subsidiaries of US parent companies.

Originality/value

Limited research is available that deals with this issue. In most cases, only general statements on deductibility of similar types of expenditure are available to taxpayers.

Details

Accounting Research Journal, vol. 27 no. 1
Type: Research Article
ISSN: 1030-9616

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Article
Publication date: 9 June 2020

Anin Rupp

This paper aims to examine whether the opportunistic use of assets securitization for earnings management is systematically widespread. It is hypothesized that with the…

Abstract

Purpose

This paper aims to examine whether the opportunistic use of assets securitization for earnings management is systematically widespread. It is hypothesized that with the passage of the Sarbanes–Oxley (SOX) Act of 2002, which imposed more stringent governance over the financial reporting process, there should be a decrease in the opportunistic use of securitization among firms that were not compliant prior to the passage.

Design/methodology/approach

The author use the SOX Act as an exogenous shock to determine whether the act had the intended effect of mitigating opportunistic securitization.

Findings

The empirical results show that there was a significant decrease in securitization among the non-compliant firms relative to the compliant firms and this reduction is related to firms using securitization opportunistically. This evidence suggests that securitization for earnings management was a systematic phenomenon and that SOX was effective in mitigating such behavior.

Originality/value

The contribution of this paper to the literature is twofold. It will identify changes in the use of asset securitization for earnings management purpose by using the exogenous variation in the strength of external governance. Furthermore, it will provide additional evidence of the effectiveness of financial regulations and have potential implications at the policy maker level.

Details

Journal of Financial Regulation and Compliance, vol. 29 no. 1
Type: Research Article
ISSN: 1358-1988

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Article
Publication date: 12 April 2011

James A. Millar and B. Wade Bowen

As a result of scandals concerning major financial crime in the early twenty‐first century, including accounting and auditing fraud and inappropriate behavior by directors

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2056

Abstract

Purpose

As a result of scandals concerning major financial crime in the early twenty‐first century, including accounting and auditing fraud and inappropriate behavior by directors on the boards of US corporations, Congress hurriedly enacted the Sarbanes‐Oxley Act (SOX) in 2002. SOX's major purpose was to restore investor confidence in America's securities markets. Small firms argued that their cost of compliance was very heavy and that their burden was greater than for larger firms, especially the costs related to section 404 of the Act, which dealt with new requirements to obtain independent audit opinions. The authors found no empirical research that supports or denies these claims. Subsequently, in 2007, the Securities and Exchange Commission reduced the Act's new audit requirements for small companies. This paper aims to examine audit fees for large and small firms.

Design/methodology/approach

The study examines actual audit fee data to investigate the increased costs paid by publicly traded companies to independent audit firms for their services due to Sarbanes‐Oxley. The authors use univariate and multivariate statistical methods to compare increases in audit fees paid by samples of 150 large firms and 150 small firms.

Findings

The study finds that both small and large firms incurred increased audit fees due to compliance with Sarbanes‐Oxley, and that small companies did incur larger increases in their cost burden.

Originality/value

The study uses actual audit fee data reported to the Securities and Exchange Commission and controls for other factors that determine audit fees in reaching its conclusions.

Details

Corporate Governance: The international journal of business in society, vol. 11 no. 2
Type: Research Article
ISSN: 1472-0701

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Book part
Publication date: 13 August 2012

Charles P. Cullinan, Pamela Barton Roush and Xiaochuan Zheng

CEO duality occurs when the same individual holds both the CEO and board Chair positions. In some countries (such as Britain) CEO duality is considered to impair good…

Abstract

CEO duality occurs when the same individual holds both the CEO and board Chair positions. In some countries (such as Britain) CEO duality is considered to impair good corporate governance. In the United States, however, CEO duality is still a common practice. The Sarbanes–Oxley Act (SOX) included many corporate governance reforms, but the Act did not address the issue of CEO duality. However, we suggest that the corporate governance environment surrounding the passage of SOX may have influenced corporate board decisions regarding CEO duality when appointing new CEOs. In this study, we seek to determine whether CEO duality changed in the post-Sox environment by investigating the likelihood of CEO duality when CEO changes took place before and after SOX. Using a sample of 182 CEO succession events before and after the passage of SOX, we find that the likelihood of combining the CEO and Chair positions for newly appointed CEOs significantly decreased in the post-SOX period relative to the pre-SOX period. Our results suggest the SOX environment fostered a greater focus on governance issues even beyond the specific provisions of SOX.

Details

Research on Professional Responsibility and Ethics in Accounting
Type: Book
ISBN: 978-1-78052-761-1

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