The effect of corporate governance regulation on transparency Evidence from the Sarbanes-Oxley Act of 2002

We argue that the Sarbanes-Oxley Act (SOX) of 2002 provides a natural experiment to study the effect of corporate governance and disclosure reform on corporate transparency. For identification, we use a difference-in-differences estimation approach and compare changes in transparency of European firms that are cross-listed in the US with changes in transparency of comparable European firms that are not cross-listed. We measure transparency based on the accuracy and dispersion of analyst earnings forecasts. Our findings suggest that, relative to the control group, European cross-listed firms became significantly more transparent after the implementation of SOX. We provide evidence that the transparency-enhancing effect of SOX was particularly pronounced for firms operating in informationally sensitive industries, such as financial services and the technology sector. We complement our analysis with a comprehensive textual analysis of corporate annual reports in order to shed light on how SOX may have affected firms’ disclosure and reporting behavior.