The Sarbanes‐Oxley Act of 2002 and Market Liquidity

Pankaj K. Jain · Jang‐Chul Kim · Zabihollah Rezaee

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Financial Markets and Investment Strategies Corporate Finance and Governance Auditing, Earnings Management, Governance

Abstract

Abstract Investors rely heavily on the trustworthiness and accuracy of corporate information to provide liquidity to the capital markets. We find that the rash of financial scandals caused a severe deterioration in market liquidity in the form of wider spreads, lower depths, and a higher adverse selection component of spreads vis‐à‐vis their benchmark levels. Regulatory responses including the Sarbanes‐Oxley Act of 2002 (SOX) had inconsequential short‐term liquidity effects but highly significant and positive long‐term liquidity effects. These liquidity improvements are positively associated with the improved quality of financial reports, several firm‐specific variables (e.g., size), and market factors (e.g., price, volatility, volume).

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References

1984Corporate financing and investment decisions when firms have information that investors do not have 1998Law and Finance 1985Continuous Auctions and Insider Trading 2000Investor protection and corporate governance 1985Bid, ask and transaction prices in a specialist market with heterogeneously informed traders 1981Auditor size and audit quality 2002The Quality of Accruals and Earnings: The Role of Accrual Estimation Errors 2002Investor Protection and Corporate Valuation

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2014Did Regulation Fair Disclosure, SOX, and Other Analyst Regulations Reduce Security Mispricing?2009The Pricing of IPOs Post‐Sarbanes‐Oxley 2009Do firms’ earnings management practices affect their equity liquidity?2004The Sarbanes-Oxley Act of 2002 and Accounting Conservatism 2017Board Structure Mandates: Consequences for Director Location and Financial Reporting 2013SOX after Ten Years: A Multidisciplinary Review

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