The Sarbanes-Oxley Act and Corporate Investment: A Structural Assessment

Journal of Financial Economics, Forthcoming

37 Pages Posted: 7 Mar 2007 Last revised: 10 Mar 2010

See all articles by Qiang Kang

Qiang Kang

Florida International University (FIU) - Department of Finance

Qiao Liu

The University of Hong Kong - School of Economics and Finance; Peking University - Guanghua School of Management

Rong Qi

St. John's University

Date Written: July 1, 2009

Abstract

We assess the impact of the Sarbanes-Oxley Act of 2002 on corporate investment in an investment Euler equation framework, where a dummy for the passage of the Act is allowed to affect the rate at which managers discount future investment payoffs. Using generalized method of moments estimators, we find that the rate U.S. firm managers apply to discount investment projects rises significantly after 2002, while the discount rate for U.K. firms remains unchanged. The effects of the legislation on corporate investment are asymmetric, and are much more significant among relatively small firms. We also find that well-governed firms, firms with a credit rating, and accelerated filers of Section 404 of the Act have become more cautious about investment.

Keywords: Sarbanes-Oxley Act, investment Euler equation, investment-implied discount rate, corporate governance

JEL Classification: G18, G31, G34, K22, E22

Suggested Citation

Kang, Qiang and Liu, Qiao and Qi, Rong, The Sarbanes-Oxley Act and Corporate Investment: A Structural Assessment (July 1, 2009). Journal of Financial Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=967950

Qiang Kang (Contact Author)

Florida International University (FIU) - Department of Finance ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

Qiao Liu

The University of Hong Kong - School of Economics and Finance ( email )

School of Economics and Finance
Pokfulam
Hong Kong
Hong Kong
852-2859-1059 (Phone)
852-2548-1152 (Fax)

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

Rong Qi

St. John's University ( email )

8000 Utopia Parkway
Queens, NY 11439
United States

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