Sarbanes‐Oxley compliance and violation: an empirical study

The purpose of this paper is to empirically examine the corporate governance and financial characteristics of firms under the new Sarbanes‐Oxley (SOX) accounting regime.

The paper first compares a comprehensive set of characteristics across firms in two states of SOX Section 404 status–Compliance and Violation. It then tests for determinants of SOX compliance in a logistic regression setting.

Several differences between compliance groups in terms of equity ownership, board structure, and executive compensation schemes are reported. However, it appears that firms found to be in violation of SOX are not systematically worse when it comes to common measures of corporate governance. The financial structure and soundness of the groups of firms are very similar. The strongest determinant of Section 404 compliance is firm size.

This result supported anecdotal evidence that compliance with SOX is achieved primarily by firms that can afford it. Further, the paper highlights an important policy issue: Is SOX really differentiating firms in terms of corporate governance or in terms of size?