Has Section 404 of the Sarbanes-Oxley Act Discouraged Corporate Investment? New Evidence from a Natural Experiment

Abstract

Prior studies conclude that one of the unintended consequences of complying with Section 404 of the Sarbanes-Oxley Act (SOX404) is a lower level of corporate risk-taking activities. However, some argue that firms complying with SOX404 benefitted from more reliable financial statements, greater transparency, and lower cost of capital, resulting in more risk-taking investments. We use the discontinuity requirement introduced by SOX404 to construct a natural experiment that isolates its effects. We find evidence that corporate investment and liquidity increased, while cost of debt decreased, for firms that had to comply with SOX404.