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The Impact Of Sarbanes-Oxley On Market Efficiency: Evidence From Mergers And Acquisitions Activity

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  • Surya Chelikani
  • Frank D’Souza

Abstract

One of the main goals of the Sarbanes Oxley Act of 2002 (SOX) is to ensure a greater flow of timely and accurate accounting information to investors. While there has been a lot of criticism of SOX, mostly with regard to compliance costs, very little light has been shed on the impact of SOX on market efficiency. The type of funding (stock vs. cash) used in mergers has been shown to be highly correlated with the level of firm mispricing. We thus use merger data gathered in the pre and post-SOX years to reveal a significant shift from stock type mergers (popular during periods of high misvaluation) to cash type mergers. We use logistic regression analysis to show that the implementation of SOX, resulted in greater reliability of market information, lower levels of mispricing and hence a more efficient market. In addition, our results also provide evidence that the SOX imposed compliance costs are not as burdensome as critics claim.

Suggested Citation

  • Surya Chelikani & Frank D’Souza, 2011. "The Impact Of Sarbanes-Oxley On Market Efficiency: Evidence From Mergers And Acquisitions Activity," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 5(4), pages 75-88.
    • Handle: RePEc:ibf:ijbfre:v:5:y:2011:i:4:p:75-88
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    References listed on IDEAS

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    Cited by:

    1. Bhabra, Harjeet S. & Hossain, Ashrafee T., 2017. "Impact of SOX on the returns to targets and acquirers in corporate tender offers," The North American Journal of Economics and Finance, Elsevier, vol. 42(C), pages 1-19.
    2. Naser Makarem & Frank Hong Liu & Lei Chen, 2023. "Evidence that financing decisions contribute to the zero-earnings discontinuity," Review of Quantitative Finance and Accounting, Springer, vol. 60(1), pages 231-257, January.

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    More about this item

    Keywords

    Sarbanes Oxley; Mergers and Acquisitions; Market Efficiency;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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