The Impact of Sarbanes-Oxley Act on Earnings Management, Return, and Risk

The Sarbanes-Oxley Act of 2002 (SOA) is one of the most significant additions to the U. S. securities laws and has fundamentally changed the landscape of corporate governance and disclosure in the U. S. This paper investigates whether the SOA discourages the widespread practice of earnings management, enhances stock returns, and causes a structural change in market risk. The contingency analysis suggests that the enactment of the SOA indeed deters earnings management, leads to higher stock returns, and results in a significant upward shift in market risk. The majority of states share these changes. Another interesting finding is that earnings management is not directly associated with stock returns when the time effect is controlled. Drawing upon the empirical results, the SOA appears to achieve its major goal of recovering investor confidence in the U. S. financial markets.