Does being Ethical Pay? Evidence from the Implementation of SOX Section 406

48 Pages Posted: 13 Feb 2024

See all articles by Saurabh Ahluwalia

Saurabh Ahluwalia

University of New Mexico - Department of Finance, International, and Techology (FIT)

Linda Ferrell

Harbert College of Business, Auburn University

O.C. Ferrell

Harbert College of Business, Auburn University

Priyank Gandhi

Rutgers University, New Brunswick

Date Written: December 5, 2023

Abstract

Firms that adopt a ‘code of ethics’ targeted towards senior financial officers (CEFO firms) in response to SOX Act Section 406 have higher valuations (Tobin’s q) than a matched sample of firms of similar size, operating in the same industry that have not yet adopted such a code of ethics (non-CEFO firms). Tracing the mechanism, higher valuations for CEFO firms result from both low risk-adjusted rates and higher cash flows. In turn, higher cash flows for CEFO firms result from increased profitability and lower compliance costs. CEFO firms also benefit from a lower probability of shareholder disputes and shareholder concerns. These results are consistent with models of integrity that predict that firms’ commitment to ethical behavior is associated with better performance.

Keywords: Code of ethics for financial officers, Financial reporting, Sarbanes-Oxley market reaction, Market value, Securities legislation, Stock returns, Tobin’s q

JEL Classification: D78, G12, G14, G18, G30, G38, K22, M41, M42, M48

Suggested Citation

Ahluwalia, Saurabh and Ferrell, Linda and Ferrell, O.C. and Gandhi, Priyank, Does being Ethical Pay? Evidence from the Implementation of SOX Section 406 (December 5, 2023). Available at SSRN: https://ssrn.com/abstract=4680568 or http://dx.doi.org/10.2139/ssrn.4680568

Saurabh Ahluwalia (Contact Author)

University of New Mexico - Department of Finance, International, and Techology (FIT) ( email )

MSC 05-3090
U of New Mexico
Albuquerque, NM 87131
United States

Linda Ferrell

Harbert College of Business, Auburn University ( email )

415 Magnolia Ave.
Auburn, AL 36849
United States

O.C. Ferrell

Harbert College of Business, Auburn University ( email )

415 Magnolia Ave.
Auburn, AL 36849
United States

Priyank Gandhi

Rutgers University, New Brunswick ( email )

New Brunswick, NJ
United States

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