Corporate Governance: The long term impact of the Sarbanes-Oxley Act on Capital structure and Investment of firms

Khanh Linh Nguyen, Duyen Dai Chu


Corporate governance can have influence on the overall performance of a firm. That influence can be positive or negative, dependent on the effectiveness of corporate governance. The existence of agency issues can make corporate governance even more complicated. In the wake of numerous infamous corporate scandals, the Sarbanes-Oxley Act was set out in the US in 2002 in order to improve corporate governance and auditing practice of publicly listed companies. Although there have been studies on the impact of the adoption of the Act on corporate governance, findings are still controversial. Employing a deductive approach and drawing on a sample dataset of 12,822 firms during a period of 31 years, this paper helps to shed more light on the long term impact of the Sarbanes-Oxley Act on corporate governance. We take capital structure and investment as the two measures of corporate governance. Our findings show that the adoption of the Act helps to reduce over-leverage and over-investment in the financing and investment decision making of firms. Our findings also reveal that firms tend to follow a target leverage level, which is consistent with the trade-off theory. We also examine the possibility of under-leverage and under-investment of firms.


Corporate governance, Sarbanes-Oxley Act, Impact, Capital Structure, Investment

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