Did the Sarbanes-Oxley act impede corporate innovation? An analysis of the unintended consequences of regulation

• Main Authors: CAO, Jerry X., GHOSH, Aurobindo, GOH, Choo Yong, Jeremy, Feichin Ted TSCHANG (or F. Ted TSCHANG)
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2016
• Subjects: Business and Corporate Communications; Corporate Finance
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/5114; https://ink.library.smu.edu.sg/context/lkcsb_research/article/6113/viewcontent/soxinnovation_18FEB2016_draft.pdf
• Institution: Singapore Management University

We investigate whether innovation by publicly listed U.S. companies deteriorated significantly after the adoption of the Sarbanes-Oxley Act of 2002. Using data on patent filings as proxies for firms‟ innovative activities, we find firms‟ innovation as measured by patents and innovation efficiency dampened significantly after the enactment of the Act. The degree of impact is related to firm-specific characteristics such as the firm‟s value (Tobin‟s Q) and its measure of corporate governance (G-Index), as well as the firm‟s operating conditions (i.e., the firm being in an high-tech industry, and being delisted or not). We find evidence that the SOX‟s impact on firms is more pronounced for growth firms, firms with low governance scores, firms operating in high-tech industries and firms that continued to stay listed. In sum, the results suggest that the SOX has an unintended consequence of stifling corporate innovation.