IDEAS home Printed from https://ideas.repec.org/a/wly/revfec/v40y2022i1p77-96.html
   My bibliography  Save this article

The propensity to save: The effect of Sarbanes–Oxley act

Author

Listed:
  • Hui Liang James
  • Roger Lirely

Abstract

The Sarbanes–Oxley Act of 2002 (SOX) serves to increase transparency and improves the governance quality of publicly traded U.S. firms. Increased transparency reduces external financing costs, thereby decreasing the reliance on internal funds for investment. Improved governance quality mitigates managers’ opportunistic cash savings. Both of these effects are predicted to affect a firm's cash policy. Employing the cumulant estimators (closed‐form minimum distance estimators) in Erickson et al. (2014, Journal of Econometrics, 183, 211) to control the errors‐in‐variables bias in the cash–cash flow sensitivity model, we find that SOX reduces firms’ propensity to save, and the effect is stronger for negative cash flow firms than positive cash flow firms. Further analysis reveals that the cash–cash flow sensitivity is conditional on a firm's financial constraint status and its existing governance quality.

Suggested Citation

  • Hui Liang James & Roger Lirely, 2022. "The propensity to save: The effect of Sarbanes–Oxley act," Review of Financial Economics, John Wiley & Sons, vol. 40(1), pages 77-96, January.
  • Handle: RePEc:wly:revfec:v:40:y:2022:i:1:p:77-96
    DOI: 10.1002/rfe.1140
    as

    Download full text from publisher

    File URL: https://doi.org/10.1002/rfe.1140
    Download Restriction: no

    File URL: https://libkey.io/10.1002/rfe.1140?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:revfec:v:40:y:2022:i:1:p:77-96. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://doi.org/10.1002/(ISSN)1873-5924 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.