Economic consequences of the Sarbanes-Oxley Act of 2002

This paper investigates the economic consequences of the Sarbanes-Oxley Act through a study of market reactions to legislative events related to the Act. I find that the cumulative market return in the U.S. around all legislative events leading to the passage of the Act is significantly negative. I then examine the private costs of major provisions of the Act by investigating the cross-sectional variation in market reactions to the rulemaking events. Regression results reject the hypothesis that the restriction of nonaudit services or the governance provisions impose no net costs on firms. The results also show that Section 404 of SOX, which mandates an internal control test, entails substantial compliance costs. The deferment of complying with Section 404 gave rise to significant cost savings for nonaccelerated filers. Finally, an examination of stock returns in foreign markets in the SOX event period generates mixed results.