Corporate Governance and Firm Value: The Impact of the 2002 Governance Rules (original) (raw)
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The 2001 to 2002 corporate scandals led to the Sarbanes Oxley Act and to various amendments to the U.S. stock exchanges' regulations. We find that the announcement of these rules has a significant effect on firm value. Firms that are less compliant with the provisions of the rules earn positive abnormal return compared to firms that are more compliant. We also find variation in the response across firm size. Large firms that are less compliant earn positive abnormal returns but small firms that are less compliant earn negative abnormal returns, suggesting that some provisions are detrimental to small firms. * Vidhi Chhaochharia is from the Worldbank and Yaniv Grinstein is from the Johnson School of Management, Cornell University.
The role of corporate governance during the pre- and post-Sarbanes Oxley periods
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This study examines the joint effects of the passing of Sarbanes-Oxley Act (SOX) of 2002 and firm-specific corporate governance mechanisms on the value-relevance of earnings. We find that value-relevance of earnings is significantly different for different sub-periods. We find that good corporate governance (proxied by lack of anti-takeover provisions) has a positive impact on the value-relevance of earnings only during the scandal (SCA) period. These results hold after controlling for changes in institutional ownership and earnings quality (EQ). Our results suggest that there is a substitution effect between good firm-specific corporate governance mechanisms and the strictness of the regulatory environment.
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This paper examines the longer-term corporate governance, compliance and valuation implications of Sarbanes-Oxley Act of 2002 (SOX) on US and foreign firms. Significant benefits of SOX are shown, particularly for small companies and US-traded foreign companies, although disproportional compliance costs are shown for the former. Firms that are less compliant with the legislation experience relatively higher abnormal returns, supporting the hypothesis that relaxing compliance constraints is value enhancing. Long-term abnormal returns are negatively related to board independence and CEO duality, but are positively related to the ownership by insiders and institutional investors.
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The recent debate on the onerous costs of compliance with the Sarbanes-Oxley Act has primarily focused on small firms. I study the effects of SOX compliance on such firms by comparing the performance of Canadian small-cap firms that are subject to SOX provisions with those that are not, while: (a) taking into account firms' internal and external governance mechanisms, including the market for corporate control, and (b) accounting for the simultaneous interactions between alternative governance mechanisms and firm performance. Firms subject to Sarbanes-Oxley experienced an incremental increase in market valuation ranging between 15.7% and 34% depending on the measure of board independence used in the estimation. Some sub-optimal deployment of the endogenous governance mechanisms is observed, while the market for corporate control serves as a positive disciplining factor.
The Long-term Valuation Impact of Sarbanes-Oxley on U.S. vs. Foreign Firms
The long-term impact of the passage of the Sarbanes-Oxley Act of 2002 (SOX) on firm valuation is examined. Long-term benefits of SOX are shown, particularly for small companies and U.S.-traded foreign companies, although disproportional compliance costs are shown for the former. Firms that are less compliant with the legislation experienced relatively higher abnormal returns, supporting the hypothesis that relaxing compliance constraints is value enhancing. Long-term abnormal returns are negatively related to board independence and CEO duality, but are positively related to the ownership by insiders and institutional investors.
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The Sarbanes-Oxley (Sarbox) legislation aimed to reduce the opacity of financial statements and improve the integrity of financial reporting by enhancing corporate disclosure and governance practices. We estimate the valuation effects of Sarbox for firms in the financial services industry and find that, except for securities firms, these firms significantly benefited from its adoption. As hypothesized, these positive effects may be attributed to expected improvement in the transparency of the relatively opaque financial services firms.
Corporate governance and firm performance: The sequel
Journal of Corporate Finance
Director stock ownership is most consistently and positively related to future corporate performance. Public policymakers and long-term investors should find this result especially relevant given their strong interest in long-term corporate performance. Equally important, corporate governance researchers should consider director stock ownership as a measure of corporate governance; this will also aid in the comparability of results across different studies. In our 2008 paper, Corporate governance and firm performance, we considered data through 2002. In this paper, we extend our sample period through 2016. These additional 14 years of data provide a powerful out-of-sample test of the specification and power of director stock ownership as a measure of corporate governance. Further, extending the period allows us to capture the dynamics of the financial crisis, the Great Recession, Sarbanes-Oxley (2002), and Dodd-Frank (2010). We find director stock ownership most consistently and positively related to future corporate performance in this out-of-sample period (2003-2016) across a battery of different specifications, estimation techniques, and for different subsamples. One particular sub-sample of considerable public interest is the 100 largest U.S. financial institutions around 2008. Bank director stock ownership is positively related to future bank performance, and bank director stock ownership is negatively related to future bank risk, both prior to and during the financial crisis-both results of considerable interest to senior bank regulators. 1. Introduction Corporate governance continues to be a focus of not just the financial media but the popular media, as well. The scandals at Wells Fargo and Equifax are just the most recent in the long line of scandals involving large well-known public U.S. corporations. Going back in time-the financial crisis of 2008 was triggered by the implosion of the big banks. Further back in time, at the turn of the new millennium, the scandals in Enron, WorldCom, Tyco, and Qwest led to their demise. After each set of these scandals, policymakers raised questions about the effectiveness of corporate governance mechanisms in these companies. This led to the inevitable call for more regulation and laws to constrain and regulate corporate behavior, to wit, the Sarbanes Oxley Act of 2002 and the Dodd-Frank Act of 2010. Have these two rather extensive set of laws addressed the governance concerns of corporate America? The recent Wells Fargo and Equifax episodes would suggest otherwise; these are particularly noteworthy because they are both in finance industries, which Dodd-Frank 2010 was explicitly designed to address. We think a more fruitful approach to addressing the corporate governance concerns is to focus on possible common themes underpinning the Enron, WorldCom, Tyco, Qwest, the big banks circa 2008, Wells Fargo, and Equifax scandals. We propose, on the basis of our more recent research, that misaligned CEO incentive compensation is a common theme underpinning the above corporate scandals. 1 In our 2008 paper, "Corporate governance and firm performance," we focused on the question: How is corporate governance
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The Sarbanes-Oxley Act (SOX) was intended to protect investors by improving the accuracy and reliability of corporate disclosures. However, critics have argued that the costs of SOX far outweigh its intended benefits. Prior studies based on stock-price reactions to SOX-related events document mixed evidence on the expected impact of SOX. In contrast, we provide evidence on the impact of SOX on operating profitability by examining the net realized costs of SOX. We find that average cash flows decline by 1.3 percent of total assets after SOX. These costs are more significant for smaller firms, for more complex firms, and for firms with lower growth opportunities.