Corporate Governance in the Era of Sarbanes-Oxley: Regulation, Governance, and Performance

Ettner, Larry W.

2006-03
2015-03-09

The results of governance research are mixed concerning the financial consequences of externally induced regulations. The debate hinges on the assumption that adoption of regulation is an exogenous factor in determining performance. Drawing on basic insights from institutional theory and innovation studies, I argue that response to regulation is in fact a mediator of the relationship between ‘quality of governance’ and financial performance. Focusing on the adoption of Sarbanes-Oxley (Sarbox) regulation by publicly traded companies, I hypothesize that governance quality is likely to affect financial success by influencing organizational responses to Sarbox. Using multiple year data from two large datasets, I test the hypothesis and find considerable support for the argument. The results of two-stage least squares analysis suggest that, although response to Sarbox is not directly related to financial performance, quality of governance affects performance through the adoption of Sarbox. Companies with high quality of governance ratings adopt Sarbox more quickly and readily than others, and experience improved financial performance. The implications for governance research and management practice are discussed.

Corporate governance.

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http://hdl.handle.net/2186/ksl:weaedm075

48 p

Doctorate of Management Programs