Has Section 404 of the Sarbanes-Oxley Act Discouraged Corporate Investment? New Evidence from a Natural Experiment

Management Science, Forthcoming

60 Pages Posted: 9 Oct 2017 Last revised: 17 Apr 2018

See all articles by Ana M. Albuquerque

Ana M. Albuquerque

Boston University Questrom School of Business

Julie Zhu

Fanhai International School of Finance(FISF), Fudan University

Date Written: March 12, 2018

Abstract

Prior studies conclude that an unintended consequence of firms complying with the Sarbanes-Oxley Act is lower levels of risk-taking activities, including investment. We first show that prior studies cannot isolate the effects of SOX from other contemporaneous events. We then use the implementation requirements of SOX404 to construct a natural experiment that isolates the effects of SOX404 for a sample of small firms. We do not find a reduction in investment and other risk-taking activities for firms that had to comply with SOX404, relative to other firms. Because small firms are expected to be the most adversely affected by the regulation, our results cast doubt on the notion that SOX404 had a negative impact on larger firms.

Keywords: SOX, Section 404, investment, corporate risk-taking, regulation, natural experiment

JEL Classification: K0, G2, O5

Suggested Citation

Albuquerque, Ana M. and Zhu, Julie, Has Section 404 of the Sarbanes-Oxley Act Discouraged Corporate Investment? New Evidence from a Natural Experiment (March 12, 2018). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3049232 or http://dx.doi.org/10.2139/ssrn.3049232

Ana M. Albuquerque

Boston University Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
617-358-4185 (Phone)
617-353-6667 (Fax)

Julie Zhu (Contact Author)

Fanhai International School of Finance(FISF), Fudan University ( email )

220 Handan Road
Shanghai, 200433
China

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