Stock Market Reactions to the Japanese Sarbanes-Oxley Act of 2006

Abstract:     
This article investigates stock market reactions to announcements related to the introduction of the Financial Instruments and Exchange Law or the so-called Japanese Sarbanes-Oxley Act (J-SOX), which was enacted to reinforce corporate accountability and responsibility after several corporate and accounting scandals in Japan. We find that the announcements leading to the passage of the J-SOX raised stock prices of firms listed on the First Section of the Tokyo Stock Exchange. Another finding is that firms with high ratio of foreign shareholders or leverage experienced more positive stock price reactions, perhaps because these firms were more prepared for J-SOX compliance, with a better governance structure. By contrast, whether the firm was audited by Big 4 audit firms did not seem to matter for investors. In addition, large firms tended to have more negative stock price reactions than small firms, perhaps due to the high costs of the J-SOX compliance.

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