The Economic Benefits of the Sarbanes-Oxley Act? Evidence from a Natural Experiment

Jun “QJ” Qian Philip E. Strahan Julie L. Zhu

Boston College Boston College Columbia University

Abstract

Section 404 of the Sarbanes-Oxley Act (SOX) requires firms with a public float over $75 million during 2002-2004 to file management reports beginning in 2004, but firms with a smaller float in each of the three years do not need to comply. Relative to firms that could avoid SOX, mandatory filers cut financial slack, increased payouts to shareholders and slowed investment growth. These firms also experienced no change in borrowing costs but an extension of bond maturity. In contrast, there are no changes in the terms of bank debt. Unlike most prior studies, our results indicate potential benefits of SOX: reduced agency problems of complying firms and improved access to public debt.