Sarbanes-Oxley and Corporate Risk-Taking

Abstract

This paper empirically examines whether the Sarbanes-Oxley Act of 2002 ("SOX") discourages risk-taking by publicly traded U.S. companies. Several provisions of SOX are likely to have this effect, including an expanded role for independent directors, an increase in director and officer liability, and rules related to internal controls. We find that several measures of risk-taking decline significantly for U.S. companies as compared with U.K. firms after SOX. The declines are related to several firm characteristics, including pre-SOX board structure, firm size, and R&D expenditures. In addition, the likelihood of initial public offerings ("IPOs") occurring in the U.S. versus the U.K. declined significantly after SOX, with the decline being significantly higher for R&D intensive industries. Overall, the evidence supports the proposition that SOX discourages risk-taking by public U.S. companies.

Keywords: Sarbanes-Oxley, Legislative policy, Corporate risk taking, Investment policy

JEL Classification: G1, G18, G30, G32, G38