Did the Sarbanes-Oxley Act Have the Desired Effect? Evidence from the Marginal Value of Corporate Cash Holdings

We examine whether passage of the Sarbanes-Oxley Act (SOX) in 2002 did in fact have the intended effect of reducing agency conflicts or did it alter managerial incentives in ways that could be detrimental to firm value. Our findings for the full sample suggest a decrease in firm value and the marginal value of cash collectively suggesting that either the provisions imposed by SOX resulted in significant compliance costs and/or lead to an increase in risk aversion of managers resulting in costs of lost opportunity. There is, however, evidence of a significant variation in the ability of the various provisions to constrain incentives of managers with some leading to reduced agency conflicts while others having the perverse effect of increasing both managerial risk aversion as well as imposing excessive costs of compliance.