Corporate Boards and Regulation: The Effect of the Sarbanes-Oxley Act and the Exchange Listing Requirements on Firm Value

Abstract

The Sarbanes-Oxley Act of 2002 and recently modified exchange listing requirements impose uniformly high levels of outside director monitoring on all firms. However, recent research in finance suggests that corporate governance structures, including boards of directors, are chosen endogenously by firms in response to their unique operating and contracting environments. Using the relative costs and benefits of outside director monitoring as a benchmark, I find significant cross-sectional variation in the wealth effects around the announcement and passage of these regulations. I find that firms which have high monitoring costs and fewer benefits from outside monitoring benefited less from the regulations. In particular, I find that the wealth effects around the passage of these new regulations are positively related to firm size and age, and negatively related to growth opportunities and the uncertainty of the firm's operating environment. The results suggest that a blanket one size fits all governance regulation may be detrimental to certain firms, particularly young, small, growth firms operating in uncertain business environments, that are costly for outsiders to monitor.

Keywords: Sarbanes-Oxley Act, corporate boards, securities regulation, corporate governance, event study

JEL Classification: G34, G38