IDEAS home Printed from https://ideas.repec.org/a/eee/reacre/v27y2015i2p129-137.html
   My bibliography  Save this article

SOX and bondholders' reliance on monitors

Author

Listed:
  • Zhao, Qiuhong
  • Ziebart, David A.

Abstract

This work investigate the changes in the market participants' reliance on five types of monitors/monitoring mechanisms (auditors, corporate governance, equity analysts, credit analysts, and banks) after the implementation of the Sarbanes–Oxley Act (SOX). By focusing on changes in weights associated with the monitoring mechanisms across implementation of SOX, the results indicate that bondholders appear to rely more on the monitoring of equity analysts, the audit committee, and lenders, and less on auditors and credit rating agencies. Importantly, the results indicate that SOX reduced the bond yield interest spread. However, while SOX may have strengthened the debt market's reliance on some monitoring mechanisms, it seems to have weakened the debt market's reliance on other monitoring mechanisms some might have assumed should have been strengthened by SOX. There are three possible explanations for the finding that SOX's extensive reform in auditing has not increased bondholders' reliance on auditors. One explanation is that it may take a longer time for investors to value the effectiveness of this monitoring mechanism after the implementation of SOX, and this impact is beyond the post-SOX period analyzed. An alternative explanation is that SOX may not solve the real problems underlying the massive corporate failures. The third explanation is the potential substitution effects of the other monitoring mechanisms.

Suggested Citation

  • Zhao, Qiuhong & Ziebart, David A., 2015. "SOX and bondholders' reliance on monitors," Research in Accounting Regulation, Elsevier, vol. 27(2), pages 129-137.
    • Handle: RePEc:eee:reacre:v:27:y:2015:i:2:p:129-137
    DOI: 10.1016/j.racreg.2015.09.004
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1052045715000338
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.racreg.2015.09.004?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. 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, May.
    2. Peter Iliev, 2010. "The Effect of SOX Section 404: Costs, Earnings Quality, and Stock Prices," Journal of Finance, American Finance Association, vol. 65(3), pages 1163-1196, June.
    3. Pankaj K. Jain & Jang‐Chul Kim & Zabihollah Rezaee, 2008. "The Sarbanes‐Oxley Act of 2002 and Market Liquidity," The Financial Review, Eastern Finance Association, vol. 43(3), pages 361-382, August.
    4. Cullinan, Charles P. & Roush, Pamela B., 2011. "Has the likelihood of appointing a CEO with an accounting/finance background changed in the post-Sarbanes Oxley era?," Research in Accounting Regulation, Elsevier, vol. 23(1), pages 71-77.
    5. Sattar A. Mansi & William F. Maxwell & Darius P. Miller, 2004. "Does Auditor Quality and Tenure Matter to Investors? Evidence from the Bond Market," Journal of Accounting Research, Wiley Blackwell, vol. 42(4), pages 755-793, September.
    6. Dowdell, Thomas D. & Kim, Jang-Chul & Klamm, Bonnie K. & Watson, Marcia Weidenmier, 2013. "Internal control reporting and market liquidity," Research in Accounting Regulation, Elsevier, vol. 25(1), pages 30-40.
    7. Oliver Hart, 2009. "Regulation and Sarbanes‐Oxley," Journal of Accounting Research, Wiley Blackwell, vol. 47(2), pages 437-445, May.
    8. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    9. Yael V. Hochberg & Paola Sapienza & Annette Vissing‐Jørgensen, 2009. "A Lobbying Approach to Evaluating the Sarbanes‐Oxley Act of 2002," Journal of Accounting Research, Wiley Blackwell, vol. 47(2), pages 519-583, May.
    10. Arnoud W. A. Boot & Todd T. Milbourn & Anjolein Schmeits, 2006. "Credit Ratings as Coordination Mechanisms," Review of Financial Studies, Society for Financial Studies, vol. 19(1), pages 81-118.
    11. Patricia M. Dechow & Richard G. Sloan & Amy P. Sweeney, 1996. "Causes and Consequences of Earnings Manipulation: An Analysis of Firms Subject to Enforcement Actions by the SEC," Contemporary Accounting Research, John Wiley & Sons, vol. 13(1), pages 1-36, March.
    12. Joseph D. Piotroski & Suraj Srinivasan, 2008. "Regulation and Bonding: The Sarbanes‐Oxley Act and the Flow of International Listings," Journal of Accounting Research, Wiley Blackwell, vol. 46(2), pages 383-425, May.
    13. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(3), pages 393-414.
    14. Alexander Dyck & Adair Morse & Luigi Zingales, 2010. "Who Blows the Whistle on Corporate Fraud?," Journal of Finance, American Finance Association, vol. 65(6), pages 2213-2253, December.
    15. Ashbaugh-Skaife, Hollis & Collins, Daniel W. & LaFond, Ryan, 2006. "The effects of corporate governance on firms' credit ratings," Journal of Accounting and Economics, Elsevier, vol. 42(1-2), pages 203-243, October.
    16. John C. Coates IV, 2007. "The Goals and Promise of the Sarbanes-Oxley Act," Journal of Economic Perspectives, American Economic Association, vol. 21(1), pages 91-116, Winter.
    17. Zhang, Ivy Xiying, 2007. "Economic consequences of the Sarbanes-Oxley Act of 2002," Journal of Accounting and Economics, Elsevier, vol. 44(1-2), pages 74-115, September.
    18. Doyle, Jeffrey & Ge, Weili & McVay, Sarah, 2007. "Determinants of weaknesses in internal control over financial reporting," Journal of Accounting and Economics, Elsevier, vol. 44(1-2), pages 193-223, September.
    19. Mark H. Lang & Karl V. Lins & Darius P. Miller, 2004. "Concentrated Control, Analyst Following, and Valuation: Do Analysts Matter Most When Investors Are Protected Least?," Journal of Accounting Research, Wiley Blackwell, vol. 42(3), pages 589-623, June.
    20. Anderson, Ronald C. & Mansi, Sattar A. & Reeb, David M., 2004. "Board characteristics, accounting report integrity, and the cost of debt," Journal of Accounting and Economics, Elsevier, vol. 37(3), pages 315-342, September.
    21. Klein, April, 2002. "Audit committee, board of director characteristics, and earnings management," Journal of Accounting and Economics, Elsevier, vol. 33(3), pages 375-400, August.
    22. Xie, Biao & Davidson, Wallace III & DaDalt, Peter J., 2003. "Earnings management and corporate governance: the role of the board and the audit committee," Journal of Corporate Finance, Elsevier, vol. 9(3), pages 295-316, June.
    23. Bronson, Scott N. & Carcello, Joseph V. & Hollingsworth, Carl W. & Neal, Terry L., 2009. "Are fully independent audit committees really necessary?," Journal of Accounting and Public Policy, Elsevier, vol. 28(4), pages 265-280, July.
    24. Cheng, Mei & Neamtiu, Monica, 2009. "An empirical analysis of changes in credit rating properties: Timeliness, accuracy and volatility," Journal of Accounting and Economics, Elsevier, vol. 47(1-2), pages 108-130, March.
    25. William R. Kinney, Jr. & Marcy L. Shepardson, 2011. "Do Control Effectiveness Disclosures Require SOX 404(b) Internal Control Audits? A Natural Experiment with Small U.S. Public Companies," Journal of Accounting Research, Wiley Blackwell, vol. 49(2), pages 413-448, May.
    26. Gopal V. Krishnan & Gnanakumar Visvanathan, 2008. "Does the SOX Definition of an Accounting Expert Matter? The Association between Audit Committee Directors' Accounting Expertise and Accounting Conservatism," Contemporary Accounting Research, John Wiley & Sons, vol. 25(3), pages 827-858, September.
    27. 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, vol. 51(1), pages 111-134, February.
    28. DeFond, Mark L. & Lennox, Clive S., 2011. "The effect of SOX on small auditor exits and audit quality," Journal of Accounting and Economics, Elsevier, vol. 52(1), pages 21-40, June.
    29. Engel, Ellen & Hayes, Rachel M. & Wang, Xue, 2007. "The Sarbanes-Oxley Act and firms' going-private decisions," Journal of Accounting and Economics, Elsevier, vol. 44(1-2), pages 116-145, September.
    30. Sanjeev Bhojraj & Partha Sengupta, 2003. "Effect of Corporate Governance on Bond Ratings and Yields: The Role of Institutional Investors and Outside Directors," The Journal of Business, University of Chicago Press, vol. 76(3), pages 455-476, July.
    31. Duchin, Ran & Matsusaka, John G. & Ozbas, Oguzhan, 2010. "When are outside directors effective?," Journal of Financial Economics, Elsevier, vol. 96(2), pages 195-214, May.
    32. Gordon, Lawrence A. & Loeb, Martin P. & Lucyshyn, William & Sohail, Tashfeen, 2006. "The impact of the Sarbanes-Oxley Act on the corporate disclosures of information security activities," Journal of Accounting and Public Policy, Elsevier, vol. 25(5), pages 503-530.
    33. Fama, Eugene F., 1985. "What's different about banks?," Journal of Monetary Economics, Elsevier, vol. 15(1), pages 29-39, January.
    34. Leuz, Christian & Triantis, Alexander & Yue Wang, Tracy, 2008. "Why do firms go dark? Causes and economic consequences of voluntary SEC deregistrations," Journal of Accounting and Economics, Elsevier, vol. 45(2-3), pages 181-208, August.
    35. Dey, Aiyesha, 2010. "The chilling effect of Sarbanes-Oxley: A discussion of Sarbanes-Oxley and corporate risk-taking," Journal of Accounting and Economics, Elsevier, vol. 49(1-2), pages 53-57, February.
    36. Bargeron, Leonce L. & Lehn, Kenneth M. & Zutter, Chad J., 2010. "Sarbanes-Oxley and corporate risk-taking," Journal of Accounting and Economics, Elsevier, vol. 49(1-2), pages 34-52, February.
    37. Shi, Charles, 2003. "On the trade-off between the future benefits and riskiness of R&D: a bondholders' perspective," Journal of Accounting and Economics, Elsevier, vol. 35(2), pages 227-254, June.
    38. Roberta Romano, 2004. "The Sarbanes-Oxley Act and the Making of Quack Corporate Governance," Yale School of Management Working Papers amz2653, Yale School of Management, revised 01 Jul 2005.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Moehrle, Stephen R. & Franzen, Laurel & Meckfessel, Michele & Reynolds-Moehrle, Jennifer, 2016. "Developments in accounting regulation: A synthesis and annotated bibliography of evidence and commentary in the 2015 academic literature," Research in Accounting Regulation, Elsevier, vol. 28(2), pages 96-108.
    2. Comprix, Joseph & Guo, Jun & Zhang, Yan & Zhou, Nan, 2017. "Setting expected rates of return on pension plan assets: New evidence on the influence of audit committee accounting experts," Research in Accounting Regulation, Elsevier, vol. 29(2), pages 159-166.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. DeFond, Mark & Zhang, Jieying, 2014. "A review of archival auditing research," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 275-326.
    2. Ormazabal, Gaizka, 2018. "The Role of Stakeholders in Corporate Governance: A View from Accounting Research," CEPR Discussion Papers 12775, C.E.P.R. Discussion Papers.
    3. Jackson, Gregory, 2010. "Understanding corporate governance in the United States: An historical and theoretical reassessment," Arbeitspapiere 223, Hans-Böckler-Stiftung, Düsseldorf.
    4. Benjamin S. Kay & Cindy M. Vojtech, 2015. "Corporate Governance Responses to Director Rule Changes," Staff Discussion Papers 15-02, Office of Financial Research, US Department of the Treasury.
    5. Ling Chu & Robert Mathieu & Chima Mbagwu, 2009. "The Impact of Corporate Governance and Audit Quality on the Cost of Private Loans," Accounting Perspectives, John Wiley & Sons, vol. 8(4), pages 277-304, November.
    6. Zinat S. Alam & Mark A. Chen & Conrad S. Ciccotello & Harley E. Ryan, 2018. "Board Structure Mandates: Consequences for Director Location and Financial Reporting," Management Science, INFORMS, vol. 64(10), pages 4735-4754, October.
    7. 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, vol. 16(3), pages 352-369, June.
    8. Todd D. Kravet & Sarah E. McVay & David P. Weber, 2018. "Costs and benefits of internal control audits: evidence from M&A transactions," Review of Accounting Studies, Springer, vol. 23(4), pages 1389-1423, December.
    9. Abdioglu, Nida & Bamiatzi, Vassiliki & Cavusgil, S.Tamer & Khurshed, Arif & Stathopoulos, Konstantinos, 2015. "Information asymmetry, disclosure and foreign institutional investment: An empirical investigation of the impact of the Sarbanes-Oxley Act," International Business Review, Elsevier, vol. 24(5), pages 902-915.
    10. Badolato, Patrick G. & Donelson, Dain C. & Ege, Matthew, 2014. "Audit committee financial expertise and earnings management: The role of status," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 208-230.
    11. Alexander, Cindy R. & Bauguess, Scott W. & Bernile, Gennaro & Lee, Yoon-Ho Alex & Marietta-Westberg, Jennifer, 2013. "Economic effects of SOX Section 404 compliance: A corporate insider perspective," Journal of Accounting and Economics, Elsevier, vol. 56(2), pages 267-290.
    12. Sugato Chakravarty & Chiraphol N. Chiyachantana & Christine Jiang, 2011. "THE CHOICE OF TRADING VENUE AND RELATIVE PRICE IMPACT OF INSTITUTIONAL TRADING: ADRs VERSUS THE UNDERLYING SECURITIES IN THEIR LOCAL MARKETS," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 34(4), pages 537-567, December.
    13. Ana Albuquerque & Julie Lei Zhu, 2019. "Has Section 404 of the Sarbanes–Oxley Act Discouraged Corporate Investment? New Evidence from a Natural Experiment," Management Science, INFORMS, vol. 65(7), pages 3423-3446, July.
    14. repec:csr:wpaper:1014 is not listed on IDEAS
    15. Afef Feki & Walid Khoufi, 2008. "L'effet des caractéristiques du conseil d'administration et de la qualité de l'information financière sur le coût de la dette (Cas des entreprises industrielles françaises)," Post-Print halshs-00525385, HAL.
    16. 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.
    17. Ahsan Habib & Md. Borhan Uddin Bhuiyan, 2016. "Problem directors on the audit committee and financial reporting quality," Accounting and Business Research, Taylor & Francis Journals, vol. 46(2), pages 121-144, February.
    18. Waters, James, 2013. "The Sarbanes-Oxley Act, industrial innovation, and real option creation," MPRA Paper 49173, University Library of Munich, Germany.
    19. Ge, Weili & Koester, Allison & McVay, Sarah, 2017. "Benefits and costs of Sarbanes-Oxley Section 404(b) exemption: Evidence from small firms’ internal control disclosures," Journal of Accounting and Economics, Elsevier, vol. 63(2), pages 358-384.
    20. Balachandran, Balasingham & Williams, Barry, 2018. "Effective governance, financial markets, financial institutions & crises," Pacific-Basin Finance Journal, Elsevier, vol. 50(C), pages 1-15.
    21. 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.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:reacre:v:27:y:2015:i:2:p:129-137. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: https://www.journals.elsevier.com/research-in-accounting-regulation .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.