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SOX Section 404 and Corporate Innovation

Published online by Cambridge University Press:  07 September 2018

Huasheng Gao Open the ORCID record for Huasheng Gao [Opens in a new window]  and
Jin Zhang Open the ORCID record for Jin Zhang [Opens in a new window]
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Abstract

This paper exploits a quasi-natural experiment to investigate the relation between the Sarbanes–Oxley Act (SOX) of 2002 and corporate innovation: firms with a public float under $75 million can delay compliance with Section 404 of the act. We find a significant decrease in the number of patents and patent citations for firms that are subject to Section 404 compliance relative to firms that are not. This relation is more pronounced when firms are financially constrained and when firms face high litigation risk. Overall, our evidence suggests that SOX imparts real costs to the economy by decreasing corporate innovativeness.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 54 , Issue 2 , April 2019 , pp. 759 - 787
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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Footnotes

1

We are grateful for the helpful comments from Martin Bugeja, Iftekhar Hasan, Kose John, Kenneth Lehn (the referee), Paul Malatesta (the editor), Tianshu Qu, Rui Shen, Shuo Wu, Julia Yu, Yachang Zeng, and seminar participants from Nanyang Technological University and the 2016 Paris Financial Management Conference. All errors are our own.

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