SOX Section 404 and Corporate Innovation

60 Pages Posted: 8 Mar 2018

See all articles by Huasheng Gao

Huasheng Gao

Fanhai International School of Finance, Fudan University

Jin Zhang

Monash University

Date Written: February 23, 2018


This paper exploits a quasi-natural experiment to investigate the relation between Sarbanes-Oxley Act (SOX) and corporate innovation: firms with a public float under $75 million can delay compliance with Section 404 of the Act. We find a significant decrease in the number of patents and patent citations for firms that are subject to Section 404 compliance relative to firms that are not. This relation is more pronounced when firms are financially constrained and when firms face high litigation risk. Overall, our evidence suggests that SOX imposes real costs to the economy by decreasing corporate innovativeness.

Keywords: Innovation; Patents; SOX; Section 404

JEL Classification: G38; O31

Suggested Citation

Gao, Huasheng and Zhang, Jin, SOX Section 404 and Corporate Innovation (February 23, 2018). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN:

Huasheng Gao (Contact Author)

Fanhai International School of Finance, Fudan University ( email )

Beijing West District Baiyun Load 10th
Shanghai, 100045
2165642222 (Phone)
2165642222 (Fax)

Jin Zhang

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800

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