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Abstract
Purpose - This paper aims to examine the effect of the Sarbanes-Oxley Act (SOX), which was signed by President George W. Bush and came into effect on July 30, 2002, on firm productivity.
Design/methodology/approach - The authors use the total factor productivity (TFP) as our measure of firm productivity.
Findings - Analyzing annual firm-level data from the Compustat database for the period of 1991-2006, the authors find that firm productivity increases at a higher rate in the post-SOX period. The results indicate that, although firms incur significant costs in complying with the requirements of the SOX, they also benefit from these requirements as evidenced by the improved productivity over time post-SOX. There is also a shift in the output elasticities from capital toward labor. The SOX has a positive effect on the output elasticity of labor but a negative impact on that of capital.
Research limitations/implications - The results have the following important implications. The SOX is a value-enhancing regulation in that it not only strengthens a firm's corporate governance but also improves its productivity. However, compliance with the SOX can impose a long-term cost on firms: the decrease in the capital investment, leading to a decline in the output elasticity of capital. If this decline in the capital investment continues, it can have an adverse effect on firm productivity in the long term.
Originality/value - This paper extends the literature along the line of the actual operational effects of the SOX regulation by examining its effect on the productivity of firms.
Keywords Sarbanes-Oxley, Productivity, Capital, Labor, Output elasticity
Paper type Research paper
(ProQuest: ... denotes formulae omitted.)
1. Introduction
This paper examines the impact of the Sarbanes-Oxley Act (SOX or Act hereafter) on firms' productivity. In the wake of corporate scandals and accounting irregularities that rattled the US capital markets, Congress passed and President George W. Bush signed the SOX into effect on July 30, 2002. The Act was enacted to enhance protection for investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws. The Act dictates improved corporate governance and increased accountability of officers and boards of directors of publicly traded companies. However, criticisms of the Act have intensified/increased[1] with some suggesting that it is...