The Robustness of the Sarbanes Oxley Effect on the U.S. Capital Market

Abstract

We re-evaluate the effects of the Sarbanes Oxley Act (SOX) on the number of listed firms in the U.S. capital market, taking into account general market conditions and firm fundamentals, especially size and profitability. By analyzing a comprehensive dataset of delistings from U.S. national stock exchanges from 1962 through 2005 and conducting both aggregate level time series and individual firm level analyses, we find the following: (1) Both general market conditions and firm fundamentals explain the frequency of delistings and firms' propensity to delist; (2) While the firm-specific logit results are consistent with recent literature documenting an increase in the frequency of delisting for small firms during the SOX time period, the time series aggregate analyses suggest that SOX is not associated with abnormal levels of delisting in general. Analyses on the population partitioned into size quintiles suggests the following: (1) prior stock return and size are significantly negatively associated with the probability of delisting for firms in all five size quintiles, meaning that smaller firms and poorly performing firms were more likely to delist across the whole time period; (2) the passage of SOX was marginally associated with an increase in the likelihood of delisting for the smallest firms in the sample; and (3) the implementation of Section 404 is associated with an increase in the likelihood of delisting for larger and poorly performing firms. Our empirical evidence is useful to regulators as they consider changes in the imposition and implementation of Section 404.