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Risk Shifts Following Sarbanes‐Oxley: Influences of Disclosure and Governance

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  • Aigbe Akhigbe
  • Anna D. Martin
  • Melinda Newman

Abstract

The Sarbanes‐Oxley Act of 2002 (SOX) aimed to improve financial reporting by enhancing corporate disclosure and governance. We find statistically significant increases, from before to after the passage of SOX, in total return variance, market risk and idiosyncratic risk. The risk increases are consistent with predictions that the legislation would cause firms to disclose more negative information, resulting in increased investment risk. However, in cross‐sectional tests, post‐SOX improvements in information certainty, board independence and monitoring are associated with smaller increases or greater decreases in risk. If SOX is responsible for these improvements, its effects are consistent with its purpose.

Suggested Citation

  • Aigbe Akhigbe & Anna D. Martin & Melinda Newman, 2008. "Risk Shifts Following Sarbanes‐Oxley: Influences of Disclosure and Governance," The Financial Review, Eastern Finance Association, vol. 43(3), pages 383-401, August.
    • Handle: RePEc:bla:finrev:v:43:y:2008:i:3:p:383-401
    DOI: 10.1111/j.1540-6288.2008.00199.x
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    Cited by:

    1. Waters, James, 2013. "The Sarbanes-Oxley Act, industrial innovation, and real option creation," MPRA Paper 49173, University Library of Munich, Germany.
    2. Balachandran, Balasingham & Faff, Robert, 2015. "Corporate governance, firm value and risk: Past, present, and future," Pacific-Basin Finance Journal, Elsevier, vol. 35(PA), pages 1-12.
    3. Premti, Arjan & Jafarinejad, Mohammad & Balani, Henry, 2021. "The impact of the Fourth Anti-Money Laundering Directive on the valuation of EU banks," Research in International Business and Finance, Elsevier, vol. 57(C).
    4. Pornanong Budsaratragoon & David Hillier & Suntharee Lhaopadchan, 2014. "Does Corporate Governance Improve Transparency in Emerging Markets?," Journal of Financial Management, Markets and Institutions, Società editrice il Mulino, issue 1, pages 87-104, July.
    5. Tiago Miguel Sá & Elisabete Duarte Neves & Cristina Gonçalves Góis, 2017. "The influence of corporate governance on changes in risk following the global financial crisis: evidence from the Portuguese stock market," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 21(4), pages 841-878, December.
    6. Mohammad I. Jizi & Robert Dixon, 2017. "Are Risk Management Disclosures Informative or Tautological? Evidence from the U.S. Banking Sector," Accounting Perspectives, John Wiley & Sons, vol. 16(1), pages 7-30, March.

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