The Impact Of The Sarbanes-Oxley Act Of 2002 On The U.S. Financial Markets
Stephen, Sheryl-Ann Kathleen
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This dissertation examines the impact of the Sarbanes-Oxley Act (SOX) on the U. S. financial markets by investigating three topics: security analysts' performance, security analyst monitoring activity and firm value, and the cost of equity capital. Each topic is presented in a separate essay. In the first essay, the impact of SOX on security analysts' performance is investigated. The findings indicate that security analysts' forecasting performance has deteriorated post-SOX for both large and small firms. In addition, this deterioration in forecasting performance holds across industries. Security analysts have also become pessimistic in their earnings forecasts post-SOX. The second essay examines the effect of SOX on security analysts' monitoring activity and firm value. Results indicate that firm value has increased for all firms in the sample, while analysts' monitoring activity has decreased. This result is not surprising as the legislation itself acts as a monitoring mechanism that reduces the need for security analysts' monitoring activity. Moreover, the increase in firm value is more significant for the group of small firms. Finally, the third essay investigates the impact of SOX on firms' cost of equity capital. Findings show that the cost of equity capital has decreased post-SOX. Based on firm size quartiles, the smallest decrease in the cost of equity capital is manifested in the smallest and largest groups of firms. Overall, the evidence presented in these three studies is supportive of the view that SOX has had a positive impact on public firms.