Abstract
This paper empirically analyzes the impact of the Sarbanes-Oxley Act on the relation between measures of corporate governance and a firm’s dividend policy in the U.S. equity market. Using the IRRC database, we find that there is a statistically significant relation between governance measures and a firm’s dividend policy in the years prior to the introduction of the Sarbanes-Oxley Act. However, following Sarbanes-Oxley, the relation between a firm’s governance structure and dividend policy changes. In particular, shareholders’ rights and the proportion of outside directors are no longer significant in explaining a firm’s dividend policy.
Highlights
The early 2000s brought to the public’s attention record-breaking bankruptcy filings in the U.S While many of these failures occurred in association with the downturn in the market, many did not
Regardless of the causes of these substantial bankruptcies, and in the wake of the Enron and WorldCom collapses in the early 2000s, a strong consensus emerged among policymakers and industry observers that existing management practices and government oversight were insufficient to promote a well-functioning and sound security market
The purpose of this paper is to investigate the impact of government regulation with respect to the Sarbanes-Oxley Act on the existing agency relation between corporate governance measures and dividend policy
Summary
The early 2000s brought to the public’s attention record-breaking bankruptcy filings in the U.S While many of these failures occurred in association with the downturn in the market, many did not. It is commonly understood that the separation of ownership and control leads to potential agencyrelated problems (Berle & Means, 1932; Jensen, 1986; Jensen & Meckling, 1976). These costs have persistently challenged market participants and regulators to engineer governance controls to mitigate any potential for managers to expropriate wealth from their stakeholders. The Sarbanes-Oxley Act demands firms to have audit committees comprised of independent directors and forces financial officers to certify that the firm’s financial statements are accurate. The Sarbanes-Oxley Act created the Public Company Accounting Oversight Board to oversee, regulate, inspect, and discipline accounting firms in their roles as auditors
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