Firm Innovation and Institutional Investment: The Role of the Sarbanes-Oxley Act

The European Journal of Finance, Forthcoming

37 Pages Posted: 23 Jan 2013

See all articles by Nida Abdioglu

Nida Abdioglu

Bandirma Onyedi Eylul University/ Faculty of Economics and Administrative Sciences

Arif Khurshed

University of Manchester - Manchester Business School, Division of Accounting Finance

Konstantinos Stathopoulos

The University of Manchester - Alliance Manchester Business School

Date Written: January 23, 2013

Abstract

This paper investigates the effect of the Sarbanes-Oxley Act (SOX) on the relation between institutional ownership (IO) and firm innovation. We find that US firms investing in innovation attract more institutional capital post-SOX. Prior literature identifies two SOX effects on the average US firm that could drive this relation, that is, a decreased level of information asymmetry (direct effect) and the consequent increased market liquidity (indirect effect). Our findings overwhelmingly support the direct effect. In particular, we find that the positive relation between IO and innovation post-SOX is mainly driven by passive and dedicated institutional investors. These investors benefit greatly from a reduction in the firm’s information asymmetry but receive little gain from improvements in market liquidity, given their long-term trading horizon. Our results are robust to different model specifications, including difference-in-differences tests, which alleviate concerns about the impact of confounding effects to our conclusions. Taken together, our findings indicate an important policy effect of SOX, namely, the strengthening of institutional investor support for firm innovation.

Keywords: Institutional investors; Sarbanes-Oxley Act; Firm Innovation; Information Asymmetry.

JEL Classification: G11, G20, G38, O32, O33

Suggested Citation

Abdioglu, Nida and Khurshed, Arif and Stathopoulos, Konstantinos, Firm Innovation and Institutional Investment: The Role of the Sarbanes-Oxley Act (January 23, 2013). The European Journal of Finance, Forthcoming , Available at SSRN: https://ssrn.com/abstract=2205609

Nida Abdioglu (Contact Author)

Bandirma Onyedi Eylul University/ Faculty of Economics and Administrative Sciences ( email )

Balikesir, 10200
Turkey

Arif Khurshed

University of Manchester - Manchester Business School, Division of Accounting Finance ( email )

Crawford House
Oxford Road
Manchester, M15 6PB
United Kingdom
+44 0 161 275 4475 (Phone)
+44 0 161 275 4023 (Fax)

Konstantinos Stathopoulos

The University of Manchester - Alliance Manchester Business School ( email )

AMBS Building
Booth Street West
Manchester, M15 6PB
United Kingdom
+44 161 275 6863 (Phone)
+44 161 275 4023 (Fax)

HOME PAGE: http://www.research.manchester.ac.uk/portal/K.Stathopoulos.html

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