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Sarbanes‐Oxley Act, perceived earnings quality and cost of capital

Author

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  • Hsihui Chang
  • Guy D. Fernando
  • Woody Liao

Abstract

Purpose - The purpose of this paper is to investigate the impact of the Sarbanes‐Oxley Act (SOX) on market‐based measures of earnings quality and cost of capital. Design/methodology/approach - The paper uses empirical data to determine measures for the market's perception of earnings quality and theex‐antecost of capital. The measures for 2001 (pre‐SOX) are compared to the measures for 2003 (post‐SOX). Findings - The results indicate that in the post‐SOX period, the market's perception of earnings quality has improved, while the firms' cost of equity capital has decreased. Research limitations/implications - At a time when debate is raging as to the overall impact of SOX on the US economy, this study provides some evidence as to its beneficial nature. A limitation is that the method of computing restricts the sample, potentially creating biases. Originality/value - This is the first study to investigate the impact of SOX on the market's perception of earnings quality and the firms' cost of equity capital.

Suggested Citation

  • Hsihui Chang & Guy D. Fernando & Woody Liao, 2009. "Sarbanes‐Oxley Act, perceived earnings quality and cost of capital," Review of Accounting and Finance, Emerald Group Publishing Limited, vol. 8(3), pages 216-231, August.
    • Handle: RePEc:eme:rafpps:v:8:y:2009:i:3:p:216-231
    DOI: 10.1108/14757700910980831
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    Citations

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    Cited by:

    1. Khalifa, Maha & Zouaoui, Haykel & Ben Othman, Hakim & Hussainey, Khaled, 2019. "Exploring the nonlinear effect of conditional conservatism on the cost of equity capital: Evidence from emerging markets," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 36(C), pages 1-1.
    2. Persakis, Anthony & Iatridis, George Emmanuel, 2017. "The joint effect of investor protection, IFRS and earnings quality on cost of capital: An international study," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 46(C), pages 1-29.
    3. Lo, May H. & Xu, Le (Emily), 2013. "Regulation FD and analysts’ vs. investors’ weightings of the cash components of earnings," Research in Accounting Regulation, Elsevier, vol. 25(2), pages 169-184.

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