1The University of Memphis George Johnson Professor of Finance and Chair of Finance department Fogelman College of Business and Economics 300 Fogelman College Admin. Building Memphis, TN 38152-3120
2The University of Memphis Thompson-Hill Chair of Excellence & Professor of Accountancy Fogelman College of Business and Economics 300 Fogelman College Admin. Building Memphis, TN 38152-3120
Purpose: This paper addresses whether and how the Sarbanes-Oxley Act of 2002(SOX) affects shareholder wealth (firm value) by focusing on the trade-off between improved corporate governance leading to a lower cost of capital and increased managerial compliance costs of regulations.
Design/Methodology: We use an analytical model of solving the management utility maximization function and the change in stock prices in response to SOX regulations. We tested our analytical model by empirically investigating financial restatements in the pre and post-SOX.
Findings: We conclude that all public companies can benefit from regulatory reforms, but the net effects vary across firms depending on investors’ perception about a firm’s governance quality before regulatory reforms and the required managerial compliance costs. Our analytical model also generates new predictions about management compliance behavior, which we test empirically by investigating restatements of financial statements.
Contributions: The model has policy implications by addressing cost-benefit of initiatives taken to improve US capital markets’ global competitiveness and they impacts on managerial compliance behavior. Our results may be relevant to regulators and public companies in Iran as the government has promoted a series of deregulation and privatization initiatives.
Originality/Value: Our model attempts to reconcile mixed empirical results of related studies pertaining to the effects of SOX on stock prices.
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