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ABSTRACT
Drawing upon the long established stream of agency theory literature, this research investigates the effect the impact of the Sarbanes-Oxley Act of 2002 (SOX) on the moderating effect of corporate governance mechanisms on the agency problem. Significant attention has been given to the costs associated with SOX, yet there is no notable research which examines the benefits derived therefrom. The purpose of this research is to fill the void in the current literature and complement its focus on costs with a serious investigation into whether benefits are being realized from this legislation. Investigating domestic, manufacturing firms listed on the New York Stock Exchange, this research illustrates that SOX caused these governance mechanisms to effectively moderate agency conflict in a post-SOX environment for this sample when they did not do so in a pre-SOX environment. Additionally, it concludes that in a model that includes audit fees, SOX improved the effectiveness of these governance mechanisms in the reduction of agency costs more predominantly with more robust results. Therefore, this research is the first to provide evidence that there are measureable benefits that flow from the passage of SOX.
Keywords: agency costs; Sarbanes-Oxley; corporate governance
INTRODUCTION
The purpose of this research was to assess the impact of the Sarbanes-Oxley Act of 2002 (SOX) on agency costs in United States (U.S.). Specifically, this research focused on domestic firms listed on the New York Stock Exchange (NYSE) in the manufacturing industry.
Much has been written about the impact of SOX from a cost perspective (both perceived and real). Many researchers and authors have espoused die increases in compliance costs caused by the passage of SOX. Not only has audit fee costs been criticized (Cielieski & Weirich, 2006; U.S. Audit Fees Double, 2005), but also other costs associated with complying with SOX's internal control requirements (Boodoo & Boodoo, 2007). Other issues related to the time and money spent on complying with this broad-based legislation have also been denounced. Baldwin (2006) noted that compliance with SOX can cost investors millions of dollars through firms' compliance efforts, causing U.S. firms to choose to list on foreign markets, most notably the London Stock Exchange, instead of U.S. markets (see also Marshall, 2006). Piotroski and Srinivasan (2007) and Doidge, Karolyi and Stulz...