Dr. Jain and Dr. Rezaee published in the International Journal of Finance and Managerial Accounting
For release: June 20, 2016
Dr. Pankaj K. Jain, George Johnson Professor and interim chairman of the Department of Finance, Insurance, and Real Estate; and Dr. Zabihollah Rezaee, Thompson-Hill Chair of Excellence and professor of Accounting, published a paper entitled "Shareholder wealth effects of management regulatory compliance" in the International Journal of Finance and Managerial Accounting.
The paper addresses whether and how the Sarbanes-Oxley Act of 2002 (SOX) affects shareholder wealth (firm value) by focusing on the trade-off between improved corporate governance leading to a lower cost of capital and increased managerial compliance costs of regulations. The study used an analytical model of solving the management utility maximization function and the change in stock prices in response to SOX regulations. The analytical model was tested by empirically investigating financial restatements in the pre and post-SOX. The results conclude that all public companies can benefit from regulatory reforms, but the net effects vary across firms depending on investors' perception about a firm's governance quality before regulatory reforms and the required managerial compliance costs. The analytical model also generates new predictions about management compliance behavior, which is tested by investigating restatements of financial statements. The model has policy implications by addressing cost-benefit of initiatives taken to improve US capital markets' global competitiveness and the impacts on managerial compliance behavior. The results may be relevant to regulators and public companies in both developed markets such as the United States and emerging markets such as Iran, where the government has promoted a series of deregulation and privatization initiatives. The model attempts to reconcile mixed empirical results of related studies pertaining to the effects of SOX on stock prices.