Graduation Year

2011

Document Type

Dissertation

Degree

Ph.D.

Degree Granting Department

Finance

Major Professor

Delroy M. Hunter

Co-Major Professor

Ninon K. Sutton

Keywords

Corporate Governance, Earnings Management, Long-Term Debt, Sarbanes-Oxley

Abstract

Since Sarbanes-Oxley (SOX) is an exogenous shock to the information environment of U.S.-listed firms, those firms might adjust their capital structures to reflect the new information environment. Using univariate and multivariate tests, including differences-in-differences, I examine SOX's effect on the capital structure of U.S.-listed firms relative to Canadian firms listed in Canada, which are treated as control firms since they are not subject to SOX. The results indicate that, after the passage of SOX, U.S.-listed firms raise their long-term debt ratios by two to three percentage points, relative to the control group. U.S. firms listed in the U.S. drive this result, while Canadian firms cross-listed in the U.S. do not alter their long-term leverage ratios after SOX. The higher debt ratios do not occur because of lower rates of growth in equity and short-term debt after SOX for U.S.-listed firms, relative to control firms. In addition, firms that heavily (lightly) manage earnings prior to SOX use less (more) debt after SOX.

Previous research argues that the Sarbanes-Oxley Act (SOX) could require managers to reveal bad news about their firms. Bad news may cause market participants, including credit rating agencies, to update their beliefs about those firms and conclude that their outlook is not as profitable as initially thought. In this paper, I examine short- and long-term credit ratings after SOX. The main finding is that, in the SOX era, aggressive earnings management is associated with lower short- and long-term credit rating levels. This result is robust to size and suppliers' outlook on the economy.

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