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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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    14. Hall, Bronwyn H & Griliches, Zvi & Hausman, Jerry A, 1986. "Patents and R and D: Is There a Lag?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(2), pages 265-83, June.
    15. Haidan Li & Morton Pincus & Sonja Olhoft Rego, 2008. "Market Reaction to Events Surrounding the Sarbanes-Oxley Act of 2002 and Earnings Management," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 51(1), pages 111-134, 02.
    16. Vidhi Chhaochharia & Yaniv Grinstein, 2007. "Corporate Governance and Firm Value: The Impact of the 2002 Governance Rules," Journal of Finance, American Finance Association, American Finance Association, vol. 62(4), pages 1789-1825, 08.
    17. Ahmed, Anwer S. & McAnally, Mary Lea & Rasmussen, Stephanie & Weaver, Connie D., 2010. "How costly is the Sarbanes Oxley Act? Evidence on the effects of the Act on corporate profitability," Journal of Corporate Finance, Elsevier, Elsevier, vol. 16(3), pages 352-369, June.
    18. Archibugi, Daniele & Filippetti, Andrea & Frenz, Marion, 2013. "Economic crisis and innovation: Is destruction prevailing over accumulation?," Research Policy, Elsevier, Elsevier, vol. 42(2), pages 303-314.
    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, Elsevier, vol. 56(1), pages 1-18.
    20. Doyle, Jeffrey & Ge, Weili & McVay, Sarah, 2007. "Determinants of weaknesses in internal control over financial reporting," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 44(1-2), pages 193-223, September.
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