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SOX, corporate transparency, and the cost of debt

Listed author(s):
  • Andrade, Sandro C.
  • Bernile, Gennaro
  • Hood, Frederick M.
Registered author(s):

    We investigate the impact of the Sarbanes–Oxley (SOX) Act on the cost of debt through its effect on the reliability of financial reporting. Using Credit Default Swap (CDS) spreads and a structural CDS pricing model, we calibrate a firm-level corporate opacity parameter in the pre- and post-SOX periods. Our analysis shows that corporate opacity and the cost of debt decrease significantly after SOX. The median firm in our sample experiences an 18bp reduction on its five-year CDS spread as a result of lower opacity following SOX, amounting to total annual savings of $ 844million for the 252 firms in our sample. Furthermore, the reduction in opacity tends to be larger for firms that in the pre-SOX period have lower accrual quality, less conservative earnings, lower number of independent directors, lower S& P Transparency and Disclosure ratings, and are more likely to benefit from SOX-compliance according to Chhaochharia and Grinstein’s (2007) criteria.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0378426613003919
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    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 38 (2014)
    Issue (Month): C ()
    Pages: 145-165

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    Handle: RePEc:eee:jbfina:v:38:y:2014:i:c:p:145-165
    DOI: 10.1016/j.jbankfin.2013.10.001
    Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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