The Impact of Sarbanes-Oxley on Market Efficiency: Evidence from Mergers and Acquisitions Activity

The International Journal of Business and Finance Research, Vol. 5, No. 4, pp. 75-88, 2011

14 Pages Posted: 7 Jul 2011

See all articles by Surya Chelikani

Surya Chelikani

Quinnipiac University

Frank P. D'Souza

Loyola University - Sellinger School of Business and Management

Date Written: 2011

Abstract

One of the main goals of the Sarbanes Oxley Act of 2002 (SOX) is to ensure a greater flow of timely and accurate accounting information to investors. While there has been a lot of criticism of SOX, mostly with regard to compliance costs, very little light has been shed on the impact of SOX on market efficiency. The type of funding (stock vs. cash) used in mergers has been shown to be highly correlated with the level of firm mispricing. We thus use merger data gathered in the pre and post-SOX years to reveal a significant shift from stock type mergers (popular during periods of high misvaluation) to cash type mergers. We use logistic regression analysis to show that the implementation of SOX, resulted in greater reliability of market information, lower levels of mispricing and hence a more efficient market. In addition, our results also provide evidence that the SOX imposed compliance costs are not as burdensome as critics claim.

Keywords: Sarbanes Oxley, Mergers and Acquisitions, Market Efficiency

JEL Classification: G34, G38

Suggested Citation

Chelikani, Surya and D'Souza, Frank P., The Impact of Sarbanes-Oxley on Market Efficiency: Evidence from Mergers and Acquisitions Activity (2011). The International Journal of Business and Finance Research, Vol. 5, No. 4, pp. 75-88, 2011, Available at SSRN: https://ssrn.com/abstract=1879589

Surya Chelikani (Contact Author)

Quinnipiac University ( email )

275 Mt. Carmel Avenue
Hamden, CT 06518
United States

Frank P. D'Souza

Loyola University - Sellinger School of Business and Management ( email )

4501 North Charles Street
Baltimore, MD 21210-2699
United States

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