Abstract
The Sarbanes-Oxley Act of 2002 (the Act) was enacted in response to numerous corporate and accounting scandals, and was aimed at reinforcing corporate accountability and professional responsibility in order to restore investor confidence in corporate America. This study examines the market reaction to the Act and finds a positive (negative) abnormal return at the time of several legislative events that increased (decreased) the likelihood of the passage of the Act. We find that the Act was wealth-increasing on average, and that the market reaction is more positive for more compliant firms with effective corporate governance, reliable financial reporting, and credible audit functions prior to its enactment. Investors interpreted the Act as good news and led toward the restoration of investor confidence in public financial information. Overall, our results suggest that the induced benefits of the Act significantly outweigh its imposed compliance costs.
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