The Sarbanes-Oxley Act of 2002 and Security Market Behavior: Early Evidence
Posted: 26 May 2006
The Sarbanes-Oxley Act of 2002 (the Act) was enacted in response to numerous corporate and accounting scandals. It aims at reinforcing corporate accountability and professional responsibility in order to restore investor confidence in corporate America. This study examines the stock 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 interpret this finding as evidence supporting the notion that the Act is wealth-increasing in the sense that its induced benefits significantly outweigh its imposed compliance costs. We also find that the market reaction is more positive for firms that are more compliant with the provisions of the Act prior to its enactment.
Keywords: Financial scandals, the Sarbanes-Oxley Act of 2002, market reactions, corporate governance
JEL Classification: G14, G28, M41
Suggested Citation: Suggested Citation