Was the Sarbanes-Oxley Act Good News for Corporate Bondholders?

Abstract

We find a significant decline in average corporate bondholder value around events leading up to the passage of the Sarbanes-Oxley Act (SOX), but only among bonds issued by firms that are expected to experience relatively large governance changes under SOX. Further, we do not find evidence that the market expects bondholders to benefit from some of the positive consequences potentially associated with SOX, such as improved earnings quality, a reduced probability of intentional misreporting, or reduced earnings volatility. Together, these findings are consistent with the bond market expecting the exogenously-imposed changes under SOX to result in corporate governance structures that make bondholders relatively worse off.

JEL Classification: G38, G12, G32, K22