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SOX, corporate transparency, and the cost of debt

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  • Andrade, Sandro C.
  • Bernile, Gennaro
  • Hood, Frederick M.

Abstract

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.

Suggested Citation

  • Andrade, Sandro C. & Bernile, Gennaro & Hood, Frederick M., 2014. "SOX, corporate transparency, and the cost of debt," Journal of Banking & Finance, Elsevier, vol. 38(C), pages 145-165.
  • Handle: RePEc:eee:jbfina:v:38:y:2014:i:c:p:145-165
    DOI: 10.1016/j.jbankfin.2013.10.001
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    1. repec:bla:jfnres:v:40:y:2017:i:3:p:369-400 is not listed on IDEAS
    2. repec:eee:riibaf:v:45:y:2018:i:c:p:197-207 is not listed on IDEAS
    3. repec:spr:reaccs:v:23:y:2018:i:2:d:10.1007_s11142-017-9424-0 is not listed on IDEAS
    4. Fu, Renhui & Gao, Fang & Kim, Yong H. & Qiu, Buhui, 2017. "Performance volatility, information availability, and disclosure reforms," Journal of Banking & Finance, Elsevier, vol. 75(C), pages 35-52.

    More about this item

    Keywords

    Sarbanes–Oxley; Corporate transparency; CDS pricing;

    JEL classification:

    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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