SOX, Corporate Transparency, and the Cost of Debt

52 Pages Posted: 26 Aug 2008 Last revised: 12 Nov 2013

See all articles by Sandro C. Andrade

Sandro C. Andrade

University of Miami - Department of Finance

Gennaro (帅纳) Bernile

University of Miami - Department of Finance

Frederick Hood

Iowa State University - Department of Accounting and Finance

Date Written: September 4, 2013

Abstract

We investigate the impact of the Sarbanes-Oxley (SOX) Act on the cost of debt through its effect on the reliability of …financial reporting. Using Credit Default Swap (CDS) spreads and a structural CDS pricing model, we calibrate a …firm-level corporate opacity parameter in the pre- and post-SOX periods. Our analysis shows that corporate opacity and the cost of debt decrease significantly after SOX. The median …firm in our sample experiences an 18 bp reduction on its …five-year CDS spread as a result of lower opacity following SOX, amounting to total annual savings of $ 844 million for the 252 …firms in our sample. Furthermore, the reduction in opacity tends to be larger for …firms that in the pre-SOX period have lower accrual quality, less conservative earnings, lower number of independent directors, lower S&P Transparency and Disclosure ratings, and are more likely to benefit from SOX-compliance according to Chhaochharia and Grinstein’s (2007) criteria.

Keywords: Sarbanes-Oxley, Corporate transparency, CDS pricing

JEL Classification: G12, G33, G38, M41

Suggested Citation

Andrade, Sandro C. and Bernile, Gennaro (帅纳) and Hood, Frederick M., SOX, Corporate Transparency, and the Cost of Debt (September 4, 2013). Midwest Finance Association 2013 Annual Meeting Paper; 21st Australasian Finance and Banking Conference 2008 Paper. Available at SSRN: https://ssrn.com/abstract=1257002 or http://dx.doi.org/10.2139/ssrn.1257002

Sandro C. Andrade (Contact Author)

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

HOME PAGE: http://moya.bus.miami.edu/~sandrade/

Gennaro (帅纳) Bernile

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

Frederick M. Hood

Iowa State University - Department of Accounting and Finance ( email )

College of Business
Ames, IA 50011-2063
United States

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