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A Lobbying Approach to Evaluating the Sarbanes-Oxley Act of 2002

Authors

  • YAEL V. HOCHBERG,

    1. Northwestern University
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  • PAOLA SAPIENZA,

    1. Northwestern University
    2. NBER
    3. CEPR. We thank Cindy Alexander, John de Figueiredo, Yaniv Grinstein, Wei Jiang, Andrew Karolyi, Christian Leuz, Holger Mueller, Abbie Smith, Morten Sorensen, Cong Wang, Luigi Zingales, an anonymous referee, and seminar participants at the European Central Bank, InterDisciplinary Center Hertzlia, Iowa State University, NBER Law and Economics Summer Meeting, New York University, Northwestern University, Norwegian School of Economics and Business, Securities and Exchange Commission, UNC - Duke Corporate Finance Conference, UNC, University of Copenhagen, University of Illinois Urbana-Champaign, University of Oregon, Yale University, the Journal of Accounting Research Conference on Securities Regulation, and the Western Finance Association Annual Meetings for helpful comments and suggestions. We are grateful to Catherine Leblond and Che Banjoko for outstanding research assistance, to Cindy Alexander for assistance with SEC requests, to Kin Lo for provision of prior lobbying data, and to Adair Morse for provision of data on corporate scandals.
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  • ANNETTE VISSING-JØRGENSEN

    1. Northwestern University
    2. NBER
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ABSTRACT

We evaluate the impact of the Sarbanes-Oxley Act (SOX) on shareholders by studying the lobbying behavior of investors and corporate insiders in order to affect the final implemented rules under SOX. Investors lobbied overwhelmingly in favor of strict implementation of SOX, while corporate insiders and business groups lobbied against strict implementation. We identify firms most affected by the law as those whose insiders lobbied against strict implementation. Such firms appear to be characterized by agency problems, rather than motivated by concerns over compliance costs. Cumulative stock returns during the five and a half months leading up to SOX passage were approximately 7% higher for corporations whose insiders lobbied against SOX disclosure-related provisions than for similar non-lobbying firms, consistent with an expectation that SOX would reduce agency problems. Analysis of returns in the post-passage implementation period suggests that investors' positive expectations with regards to the effects of these provisions were warranted.

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