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The Sarbanes-Oxley Act, industrial innovation, and real option creation

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  • Waters, James
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    Abstract

    We look at the effect of the US Sarbanes-Oxley (SOX) financial regulation on industrial innovation. Our theoretical framework shows it creating immediate uncertainty about its costs and future resolution of cost and managerial performance uncertainty. Real option value is created for investment delay. We construct a panel of patenting data and fit our model to it. We find a dip in patenting after SOX and subsequent medium term recovery, with larger dips for small, risky, and new companies. In the medium term, these companies continue to have relatively lower patenting. Like SOX, the dynamic behaviour is found only to apply to US companies. Our results have implications for policy and analysis.

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    File URL: http://mpra.ub.uni-muenchen.de/49173/
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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 49173.

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    Date of creation: 19 Aug 2013
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    Handle: RePEc:pra:mprapa:49173

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    Keywords: Innovation; Patents; Sarbanes-Oxley; Regulation; Real options;

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    2. Archibugi, Daniele & Filippetti, Andrea & Frenz, Marion, 2013. "Economic crisis and innovation: Is destruction prevailing over accumulation?," Research Policy, Elsevier, vol. 42(2), pages 303-314.
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    18. Feng Gao & Joanna Shuang Wu & Jerold Zimmerman, 2009. "Unintended Consequences of Granting Small Firms Exemptions from Securities Regulation: Evidence from the Sarbanes-Oxley Act," Journal of Accounting Research, Wiley Blackwell, vol. 47(2), pages 459-506, 05.
    19. Cheng, Mei & Dhaliwal, Dan & Zhang, Yuan, 2013. "Does investment efficiency improve after the disclosure of material weaknesses in internal control over financial reporting?," Journal of Accounting and Economics, Elsevier, vol. 56(1), pages 1-18.
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