ECONOMIC CONSEQUENCES

OF THE SARBANES–OXLEY
ACT OF 2002
Ivy Xiying Zhang

Presented by:
Regine Marie Talucod
 SARBANES-OXLEY ACT OF 2002

Reason: Consecutive accounting scandals that hits

the United States
Enacted: July 30, 2002

Major Provisions:
• Section 302: Disclosure of Control
• Section 404: Assessment of Internal Controls
• Section 802: Criminal Penalties for
Influencing U.S. Agency Investigation/Proper
Administration

Add a Footer 22
ECONOMIC CONSEQUENCES OF THE SARBANES–OXLEY
ACT OF 2002

I. Introduction
I. Motivation of the study
II.Research Question
III.Hypotheses
II.Methods
III.Result and Interpretation
IV.Conclusion
V.Key Take Away
Ivy Xiying Zhang

33
 INTRODUCTION

Motivation of the Study

• Inconclusive results on the consequences of prior securities

legislation in the economy (SEA 1933 and 1934)
• SOX: Cost of compliance > benefits

44
 INTRODUCTION

Research Question

What are the economic consequences of the Sarbanes-

Oxley Act of 2002?

55
 INTRODUCTION
Hypotheses:

H1: If SOX imposed net costs on U.S. firms, firms’ cumulative returns adjusted for the
impact of contemporaneous economic news around the SOX rulemaking events would
be negative.

H2: If the restriction on auditor’s provision of non-audit services imposed net costs on
firms, firms purchasing more non-audit services prior to SOX would incur greater costs
and experience more negative cumulative abnormal returns around the SOX rulemaking
events.

66
 INTRODUCTION

Hypotheses:

H3: If the governance provisions of SOX imposed net costs on firms, firms with
corporate governance structure weaker than optimum would incur more costs and
experience more negative cumulative abnormal returns around the SOX rulemaking
events.
H4: If Section 404 imposed net costs on firms, firms with more complex business would
incur greater costs and experience more negative cumulative abnormal returns around
the SOX rulemaking events.

77
 INTRODUCTION

Hypotheses:

H5: If the deferment of Section 404 compliance was beneficial, firms that obtained a
longer extension period would experience more positive abnormal returns than firms
that were required to comply with Section 404 earlier around the announcement of
postponing the compliance dates.
H6: If the provisions on incentive pay and insider trading imposed net costs on firms,
firms that use incentive-based compensation excessively would incur greater costs and
experience more negative cumulative abnormal returns around the SOX rulemaking
events.

88
 METHODS
Research Design
• Overall U.S. market reaction to the legislative events leading to SOX

99
REGRESSION RESULT

10
10
 RESULT OF TESTING FOR H1
Cumulative market returns in the U.S. over the event period

11
11
 RESEARCH DESIGN H2-H4 AND H6

Cross-sectional variation in abnormal returns around the rule-making events

12
12
RESULT OF TESTING FOR H2-H4 AND H6

13
13
RESULT OF TESTING FOR H2-H4 AND H6

14
14
 RESEARCH DESIGN H5

Market reactions to the announcement of postponing compliance with

Section 404

15
15
 RESEARCH DESIGN H5

Market reactions to the announcement of postponing compliance with

Section 404

16
16
RESULT OF TESTING FOR H5

17
17
 CONCLUSION

Sarbanes Oxley Act of 2002 imposes net costs on

complying firms.

Reminder: there are other contributing variables that might affect the
negative cumulative abnormal return around key SOX events that was not
captured by the expectation model.

18
18
THANK YOU

19