The Sarbanes-Oxley Act of 2002 and Security Market Behavior: Early Evidence

56 Pages Posted: 22 Mar 2004

See all articles by Zabihollah Rezaee

Zabihollah Rezaee

University of Memphis - School of Accountancy

Pankaj K. Jain

University of Memphis - Fogelman College of Business and Economics

Multiple version iconThere are 2 versions of this paper

Date Written: May 2005

Abstract

The Sarbanes-Oxley Act of 2002 (the Act) was enacted in response to numerous corporate and accounting scandals, and was aimed at reinforcing corporate accountability and professional responsibility in order to restore investor confidence in corporate America. This study examines the market reaction to the Act and finds a positive (negative) abnormal return at the time of several legislative events that increased (decreased) the likelihood of the passage of the Act. We find that the Act was wealth-increasing on average, and that the market reaction is more positive for more compliant firms with effective corporate governance, reliable financial reporting, and credible audit functions prior to its enactment. Investors interpreted the Act as good news and led toward the restoration of investor confidence in public financial information. Overall, our results suggest that the induced benefits of the Act significantly outweigh its imposed compliance costs.

Keywords: Financial scandals, the Sarbanes-Oxley Act of 2002, market reactions, corporate governance

JEL Classification: G14, G28, M41

Suggested Citation

Rezaee, Zabihollah and Jain, Pankaj K., The Sarbanes-Oxley Act of 2002 and Security Market Behavior: Early Evidence (May 2005). Available at SSRN: https://ssrn.com/abstract=498083

Zabihollah Rezaee (Contact Author)

University of Memphis - School of Accountancy ( email )

Fogelman College of Business and Economics
Memphis, TN 38152-6460
United States
901-678-4652 (Phone)

Pankaj K. Jain

University of Memphis - Fogelman College of Business and Economics ( email )

Memphis, TN 38152
United States

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