The Sarbanes-Oxley Act of 2002 and Market Liquidity

22 Pages Posted: 14 Jul 2008

See all articles by Pankaj K. Jain

Pankaj K. Jain

University of Memphis - Fogelman College of Business and Economics

Jang-Chul Kim

Northern Kentucky University - Haile/US Bank College of Business

Zabihollah Rezaee

University of Memphis - School of Accountancy

Abstract

Investors rely heavily on the trustworthiness and accuracy of corporate information to provide liquidity to the capital markets. We find that the rash of financial scandals caused a severe deterioration in market liquidity in the form of wider spreads, lower depths, and a higher adverse selection component of spreads vis-à-vis their benchmark levels. Regulatory responses including the Sarbanes-Oxley Act of 2002 (SOX) had inconsequential short-term liquidity effects but highly significant and positive long-term liquidity effects. These liquidity improvements are positively associated with the improved quality of financial reports, several firm-specific variables (e.g., size), and market factors (e.g., price, volatility, volume).

Suggested Citation

Jain, Pankaj K. and Kim, Jang-Chul and Rezaee, Zabihollah, The Sarbanes-Oxley Act of 2002 and Market Liquidity. Financial Review, Vol. 43, Issue 3, pp. 361-382, August 2008. Available at SSRN: https://ssrn.com/abstract=1158738 or http://dx.doi.org/10.1111/j.1540-6288.2008.00198.x

Pankaj K. Jain (Contact Author)

University of Memphis - Fogelman College of Business and Economics ( email )

Memphis, TN 38152
United States

Jang-Chul Kim

Northern Kentucky University - Haile/US Bank College of Business ( email )

Dept of Accounting, Finance, and Business Law
Highland Heights, KY 41099
United States
859-572-1486 (Phone)

Zabihollah Rezaee

University of Memphis - School of Accountancy ( email )

Fogelman College of Business and Economics
Memphis, TN 38152-6460
United States
901-678-4652 (Phone)

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