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The effect of the Sarbanes-Oxley Act on innovation

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  • Waters, James

Abstract

This paper adds to the literature on the Sarbanes-Oxley Act's net effects by looking at whether its passage was associated with a change in innovation and patenting. Its effects are separated into temporary uncertainty and changes in long term investment incentives in a dynamic programming problem faced by innovators who learn over time about SOX's effect. Innovation is found to fall under uncertainty for potential losses that are low relative to the potential profits. As companies learn, innovation rates readjust to SOX's long term persistent effect. We examine US patenting in stem cell technologies from 2001 to 2009 for SOX related changes. To reduce the dependence of our estimates on timing assumptions, we look for changes over the whole period. We firstly use a rolling break test with a single break point with Monte Carlo correction to p-values for search process endogeneity and MLE bias. Secondly, we run a hidden Markov model allowing for multiple states in the patent process and transitions between the states. We find a large and statistically significant change at a date consistent with a SOX effect under both testing methods. A three state hidden Markov model finds subsequent correction consistent with the theoretical model. Four competing explanations are found to account incompletely for the observed data.

Suggested Citation

  • Waters, James, 2011. "The effect of the Sarbanes-Oxley Act on innovation," MPRA Paper 28072, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:28072
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    File URL: https://mpra.ub.uni-muenchen.de/47530/8/MPRA_paper_47530.pdf
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    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. Blazsek, Szabolcs & Escribano, Alvaro, 2010. "Knowledge spillovers in US patents: A dynamic patent intensity model with secret common innovation factors," Journal of Econometrics, Elsevier, vol. 159(1), pages 14-32, November.
    3. 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, vol. 27(2), pages 265-283, June.
    4. Hollis Ashbaugh-Skaife & Daniel W. Collins & William R. Kinney Jr & Ryan Lafond, 2009. "The Effect of SOX Internal Control Deficiencies on Firm Risk and Cost of Equity," Journal of Accounting Research, Wiley Blackwell, vol. 47(1), pages 1-43, March.
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    9. 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.
    10. Wintoki, M. Babajide, 2007. "Corporate boards and regulation: The effect of the Sarbanes-Oxley Act and the exchange listing requirements on firm value," Journal of Corporate Finance, Elsevier, vol. 13(2-3), pages 229-250, June.
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    14. James S. Linck & Jeffry M. Netter & Tina Yang, 2009. "The Effects and Unintended Consequences of the Sarbanes-Oxley Act on the Supply and Demand for Directors," Review of Financial Studies, Society for Financial Studies, vol. 22(8), pages 3287-3328, August.
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    More about this item

    Keywords

    Sarbanes-Oxley; investment; innovation; patents;

    JEL classification:

    • K2 - Law and Economics - - Regulation and Business Law
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing

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