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The effect of the Sarbanes-Oxley Act on firm productivity
Journal article   Open access   Peer reviewed

The effect of the Sarbanes-Oxley Act on firm productivity

Hsihui Chang and Helen Choy
Journal of CENTRUM cathedra, v 9(2), pp 120-142
01 Sep 2016
DOI: https://doi.org/10.1108/JCC-09-2016-0012
url
https://doi.org/10.1108/JCC-09-2016-0012View
Published, Version of Record (VoR) Open

Abstract

Accounting Assurance services Audits Bush, George W Compliance Corporate governance Costs Directors Economic models Economics Elasticity of demand Federal regulation Internal auditors Investments Productivity Productivity measurement Public Company Accounting Reform & Investor Protection Act 2002-US Public policy Regulation of financial institutions Stock exchanges Studies
This paper aims to examine the effect of the Sarbanes-Oxley Act (SOX), which was signed by President George W. Bush and came into effect on July 30, 2002, on firm productivity. The authors use the total factor productivity (TFP) as our measure of firm productivity. Analyzing annual firm-level data from the Compustat database for the period of 1991-2006, the authors find that firm productivity increases at a higher rate in the post-SOX period. The results indicate that, although firms incur significant costs in complying with the requirements of the SOX, they also benefit from these requirements as evidenced by the improved productivity over time post-SOX. There is also a shift in the output elasticities from capital toward labor. The SOX has a positive effect on the output elasticity of labor but a negative impact on that of capital. The results have the following important implications. The SOX is a value-enhancing regulation in that it not only strengthens a firm's corporate governance but also improves its productivity. However, compliance with the SOX can impose a long-term cost on firms: the decrease in the capital investment, leading to a decline in the output elasticity of capital. If this decline in the capital investment continues, it can have an adverse effect on firm productivity in the long term. This paper extends the literature along the line of the actual operational effects of the SOX regulation by examining its effect on the productivity of firms.

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