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The Sarbanes-Oxley Act of 2002 and Market Liquidity

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Author Info

  • Pankaj K. Jain
  • Jang-Chul Kim
  • Zabihollah Rezaee

Abstract

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). Copyright (c) 2008, The Eastern Finance Association.

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Bibliographic Info

Article provided by Eastern Finance Association in its journal Financial Review.

Volume (Year): 43 (2008)
Issue (Month): 3 (08)
Pages: 361-382

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Handle: RePEc:bla:finrev:v:43:y:2008:i:3:p:361-382

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Web page: http://www.easternfinance.org/
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Cited by:
  1. Shen, Carl Hsin-han, 2014. "Pecking order, access to public debt market, and information asymmetry," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 291-306.
  2. Paolo Polidori & Désirée Teobaldelli, 2012. "Corporate Criminal Liability and Optimal Behavior by Firms.Internal Monitoring Devices versus Managerial Incentives," Working Papers 1216, University of Urbino Carlo Bo, Department of Economics, Society & Politics - Scientific Committee - L. Stefanini & G. Travaglini, revised 2012.
  3. Chung, Huimin & Sheu, Her-Jiun & Wang, Juo-Lien, 2009. "Do firms' earnings management practices affect their equity liquidity?," Finance Research Letters, Elsevier, vol. 6(3), pages 152-158, September.
  4. Martina Vitézová, 2011. "Market Perception of SOX Act in the Case of US Listed Banks," European Research Studies Journal, European Research Studies Journal, vol. 0(4), pages 155-170.
  5. Li, Wei-Xuan & Chen, Clara Chia-Sheng & French, Joseph J., 2012. "The relationship between liquidity, corporate governance, and firm valuation: Evidence from Russia," Emerging Markets Review, Elsevier, vol. 13(4), pages 465-477.
  6. Dyakov, Teodor & Verbeek, Marno, 2013. "Front-running of mutual fund fire-sales," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 4931-4942.
  7. Lee, Changmin, 2011. "New evidence on what happens to CEOs after they retire," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 474-482, June.

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