The Sarbanes-Oxley Act and corporate acquisitions

Bhabra, Harjeet S.; Hossain, Ashrafee Tanvir

doi:10.1108/mf-10-2016-0291

Cited by 13 publications

(36 citation statements)

References 55 publications

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“…In this paper we find compelling evidence that despite continued positive abnormal returns for acquirers of private targets, these positive returns have decreased significantly in the post-SOX period. This is in sharp contrast to the higher abnormal returns observed for acquirers of public targets in the post-SOX period (Bhabra and Hossain, 2017a, 2017b.…”

Section: Discussioncontrasting

confidence: 79%

“…We also compute announcement CARs for subsamples since deal and firm‐specific factors have been known to affect acquirer returns. For example, acquirers in cash‐only deals perform better (Datta et al , 2001; Bhabra and Hossain, 2017a). In addition, Moeller et al (2004) find that acquirer excess returns around acquisition announcement vary with firm and deal size.…”

Section: Methodsmentioning

confidence: 99%

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Sarbanes‐Oxley Act and the acquisition of private targets

Bhabra

Hossain

2020

Accounting & Finance

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Using a sample of private targets of public acquirers in the US, we find that after the passage of the Sarbanes Oxley Act, acquirer announcement returns are lower, targets are larger, suffer from lower valuation discounts, and receive higher acquisition premiums relative to similar acquisitions pre-SOX. In addition, acquirer returns are negatively related to proxies for the private target's readiness to comply with SOX Section 404 (quality of internal controls). Our evidence suggests that post-SOX, private targets are less opaque, have lower valuation uncertainty, and enjoy stronger bargaining position resulting from tighter internal controls around reporting and disclosure.

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Section: Discussioncontrasting

confidence: 79%

Section: Methodsmentioning

confidence: 99%

Sarbanes‐Oxley Act and the acquisition of private targets

Bhabra

Hossain

2020

Accounting & Finance

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“…While one interpretation could be that a reduction in agency conflicts post-SOX reduces over-investment and hence the increase in marginal value of capital expenditure (see, e.g. Bhabra and Hossain, 2017b), another possibility is that a possible reduction in the premium demanded by investors, thus reducing the discount rate applied to investment projects and consequently increasing the contribution that capital expenditures make to firm value. There is no evidence to suggest an increase in risk aversion or of SOX imposing excessive costs for the full sample, unless one believes that capital expenditures forgone following an increase in the perceived discount rate or because of a lack of funds due to compliance costs were actually value destroying in the first place.…”

Section: Resultsmentioning

confidence: 99%

Sarbanes-Oxley, agency conflicts and the marginal value of capital expenditure

Bhabra

Rooney

2019

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Purpose The purpose of this paper is to examine the relationship between the strength of corporate governance and the value of firm-level investment policies following the passage of the Sarbanes–Oxley (SOX) Act of 2002 and the associated changes to the listing requirements of major stock exchanges. In particular the authors seek to examine potential changes in the market’s assessed value of capital expenditures after the passage of the SOX Act relative to before. Design/methodology/approach The authors employ a difference-in-difference methodology, centred on the year of the passage of the SOX Act to test for the role of governance on the marginal value of capital expenditures. Excess stock returns are calculated by subtracting Fama and French (1993) size and book-to-market portfolio value-weighted returns from the firms’ annual stock returns. Each firm is grouped into one of 25 size and book-to-market portfolios for each year in the sample, with size and the book-to-market ratio proxying for sensitivity to common risk factors in stock returns (Fama and French, 1993). Findings The authors find that markets responded to the change in governance brought about by the new regulation by altering the value of firm-level capital expenditures in a way that is generally consistent with predictions of agency theory. While the overall findings imply a reduction in agency conflicts post-SOX, there is some evidence that certain firms may have suffered excessive costs of compliance, while still others saw managers become excessively risk averse. Research limitations/implications The study has implications related to the efficacy of legislation. Cross-sectional variation in the effect of SOX on the marginal value of capital expenditures suggests that one-size-fits-all legislative approach can have both expected as well as unintended consequences. The study limits its analysis to examining the impact of three significant provisions of the Act. While, the value implications of the Act are largely captured by the selected three, a more comprehensive study could expand on the set of provisions studies to obtain a more granular level impact. Practical implications This research should add to the growing body of the literature examining the effect of SOX on firms’ real activities and decisions, as well as contribute to the debate on whether the Act was beneficial or costly to firms. With particular reference to the impact of capital expenditure on firm value, the research contributes to the sparse literature examining the contribution of capital expenditures to firm value and the role that agency conflicts play in this relationship. Additionally, this research adds to the growing body of the literature that examines the costs and benefits of the sweeping new regulations brought on by the adoption of SOX. Social implications Given the importance of investment policy for economic productivity and growth, the insights provided by findings in this research should benefit lawmakers both within the USA as well as in countries where corporate misconduct and fraud is a concern. Originality/value This is the first study that examines the impact of the SOX Act on the way capital markets value firm-level investment in capital expenditures. Since use of corporate resources by managers is fraught with agency conflicts, the role of SOX in potentially alleviating this conflict as revealed by the tests in this study are very valuable.

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“…Our sample consists of successful public merger and tender offers from May 2003 to December 2012 obtained from the SDC Platinum Database. We start our sample period in 2003, as the Sarbanes–Oxley Act (SOX) was passed in 2002, and previous research (e.g., Egan 2005; Masulis, Wang, and Xie 2007; Bhabra and Hossain 2017a, 2017b, 2018) has shown that SOX influenced M&A market activity. We identify the financial crisis period as March 2007 to February 2009, as noted by the Federal Reserve Bank of St. Louis in USA Today .…”

Section: Methodsmentioning

confidence: 99%

POSTCRISIS M&As AND THE IMPACT OF FINANCIAL CONSTRAINTS

Cleary

Hossain

2020

J of Financial Research

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We find that mergers and acquisitions (M&As) occurring after the 2007-2009 financial crisis were significantly more value enhancing than precrisis M&As, in both the short and long term. This superior postcrisis performance can be attributed to an increase in external financing constraints following the crisis that caused a decline in general financing availability. This decline restricted the universe of potential acquiring firms to those that were less financially constrained, whereas the typical postcrisis target firm was more financially constrained. As a result, postcrisis acquirers were able to obtain targets at more attractive prices relative to their intrinsic value during the precrisis period when external financing was much less constrained. We also find that the typical postcrisis acquirer had greater long-term focus than their precrisis counterparts and used their financial strength to capitalize on strategic opportunities. JEL Classification: G32, G341 Most studies focus on the poor absolute performance of M&As during waves and/or compare the performance during waves to that over longer periods, not directly to corresponding postwave M&A performance. Alexandridis, Antypas, and Travlos (2017) focus on postwave performance (2010-2015) but do not directly compare it to performance during the preceding merger wave (2003)(2004)(2005)(2006)(2007) but rather to a longer period (1990)(1991)(1992)(1993)(1994)(1995)(1996)(1997)(1998)(1999)(2000)(2001)(2002)(2003)(2004)(2005)(2006)(2007)(2008)(2009)) that includes two merger waves and three periods of subdued M&A activity.

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The Sarbanes-Oxley Act and corporate acquisitions

Cited by 13 publications

References 55 publications

Sarbanes‐Oxley Act and the acquisition of private targets

Sarbanes‐Oxley Act and the acquisition of private targets

Sarbanes-Oxley, agency conflicts and the marginal value of capital expenditure

POSTCRISIS M&As AND THE IMPACT OF FINANCIAL CONSTRAINTS

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