Abstract

This study investigates the long-term impact of the passage of the Sarbanes-Oxley Act of 2002 (SOX) on firm valuation. We detect a significant positive abnormal stock return during a 42-month period after the passage of the SOX. In particular, we find that small companies and U.S.-traded foreign companies experienced more a favourable post-SOX market reaction than large U.S. companies. Firms that are less compliant with the new legislation experienced higher abnormal returns than firms that are more compliant, which implies that investors anticipate low-compliant companies to have more potential to improve corporate governance and financial disclosure therefore benefit shareholders more from SOX's enactment. Results from our cross-sectional analysis indicate that variations in the observed long-term abnormal returns can be explained by certain firm-specific corporate governance characteristics. We find that the long-term abnormal returns are negatively related to board independence and CEO duality, but are positively correlated with the ownership by insiders and institutional investors. We also find evidence that SOX imposed a significant financial burden that fell disproportionately on small firms. On the whole, our results suggest that although SOX imposes a substantial compliance burden on public companies, it is value-enhancing in the long run.