Regulating Risk

Ana Albuquerque’s research suggests Sarbanes-Oxley may have spurred, not dented, investment

After a slew of high-profile corporate accounting scandals, most notably at Enron, Congress passed the Sarbanes-Oxley Act (SOX) in 2002. It beefed up oversight of company financial information—and threw in stiff penalties for those cooking the books.

At the outset, many speculated the law—particularly Section 404 (SOX 404), a series of reporting and compliance requirements designed to monitor a company’s internal controls on financial reporting—would reduce the amount of investment and risk-taking that a firm might be willing to take. For Ana Albuquerque, an associate professor of accounting, the reasoning seemed off. “If I’m a CEO, am I going to stop creating excellent products and generating value for shareholders because I have to comply with SOX 404? Probably not,” she says.

To understand the nuanced effects of the requirements, Albuquerque and Julie Lei Zhu of the Shanghai Advanced Institute of Finance, China, studied how similar US firms with different SOX reporting requirements managed their investments. They looked at more than 400 firms that were just above and just below the threshold at which a firm must begin SOX 404 filing. They examined firms’ investment activities before the regulations came into full effect and compared them to investment activities at the same firms in 2004 and 2005, after the exact details of compliance requirements were in place.

“If I’m a CEO, am I going to stop creating excellent products and generating value for shareholders because I have to comply with SOX 404? Probably not.”
Ana Albuquerque, associate professor of accounting

They found companies didn’t cut back on their investment activities—and that they may have instead increased them. Filing also appeared to bring other benefits. Banks typically offered filing firms larger loans with lower collateral requirements compared to nonfiling firms. “Credit terms improved because they were disclosing more information,” Albuquerque says.