Corporate Governance Regulation: How Poor Management Is Destroying the Global Economy

Chapter 5

Sarbanes-Oxley's Effect on Investor Risk^a

Summary

This study seeks to evaluate, in a global context, the impact of the Sarbanes-Oxley Act on a particular risk measure of importance to investors (risk-adjusted returns), and two measures of risk due to asymmetry (upside and downside risk). A unique dataset permits a dual evaluation of the law's impact upon such measures in leading non-U.S. economies as well (i.e., “ripple effects”). Hypotheses are empirically evaluated on a sample (n = 712) of the largest U.S. and European firms (control) using daily return data from 1993 through 2009—one of the most extensive data sets employed in the literature on this topic to date. The reliability of our risk measures is carefully evaluated using multiple approaches, including Fama-MacBeth regressions. We then employ a series of difference-in-differences analyses to empirically assess Sarbanes-Oxley's impact upon equity risk.

The findings suggest Sarbanes-Oxley decreased both risk-adjusted returns and upside risk, whereas downside risk fails to explain the cross section of returns for the largest U.S. firms. From a global perspective, we suggest that the enactment of Sarbanes-Oxley's in the United States motivated leading non-U.S. economies to adopt similar regulatory measures, which caused “ripple effects”—for example, effects similar to those documented in this paper—in leading non-U.S. economies.

The findings suggest that comprehensive financial regulations, such as the Sarbanes-Oxley ...