We are grateful for the comments and suggestions from participants at the 14th Annual Conference of Financial Economics and Accounting (CFEA) at Indiana University, the 2003 Mid-South Doctoral Research consortium, the 2003 Annual Meeting of the Financial Management Association International (FMA), and the 2004 Annual Meeting of the American Accounting Association. We also appreciate the comments from two anonymous reviewers and the editor, Arnie Cowan.
The Sarbanes-Oxley Act of 2002 and Market Liquidity
Article first published online: 8 JUL 2008
© 2008, The Eastern Finance Association
Volume 43, Issue 3, pages 361–382, August 2008
How to Cite
Jain, P. K., Kim, J.-C. and Rezaee, Z. (2008), The Sarbanes-Oxley Act of 2002 and Market Liquidity. Financial Review, 43: 361–382. doi: 10.1111/j.1540-6288.2008.00198.x
- Issue published online: 8 JUL 2008
- Article first published online: 8 JUL 2008
- Sarbanes-Oxley Act;
- stock market liquidity;
- corporate governance;
- financial reporting;
- accounting fraud
Investors rely heavily on the trustworthiness and accuracy of corporate information to provide liquidity to the capital markets. We find that the rash of financial scandals caused a severe deterioration in market liquidity in the form of wider spreads, lower depths, and a higher adverse selection component of spreads vis-à-vis their benchmark levels. Regulatory responses including the Sarbanes-Oxley Act of 2002 (SOX) had inconsequential short-term liquidity effects but highly significant and positive long-term liquidity effects. These liquidity improvements are positively associated with the improved quality of financial reports, several firm-specific variables (e.g., size), and market factors (e.g., price, volatility, volume).