Sarbanes‐Oxley Act, perceived earnings quality and cost of capital

Abstract

Purpose The purpose of this paper is to investigate the impact of the Sarbanes‐Oxley Act (SOX) on market‐based measures of earnings quality and cost of capital. Design/methodology/approach The paper uses empirical data to determine measures for the market's perception of earnings quality and the ex‐ante cost of capital. The measures for 2001 (pre‐SOX) are compared to the measures for 2003 (post‐SOX). Findings The results indicate that in the post‐SOX period, the market's perception of earnings quality has improved, while the firms' cost of equity capital has decreased. Research limitations/implications At a time when debate is raging as to the overall impact of SOX on the US economy, this study provides some evidence as to its beneficial nature. A limitation is that the method of computing restricts the sample, potentially creating biases. Originality/value This is the first study to investigate the impact of SOX on the market's perception of earnings quality and the firms' cost of equity capital.