The effect of the Sarbanes-Oxley Act of 2002 on agency costs and firm transparency

In the first chapter, I describe how disclosure regulation, specifically the Sarbanes-Oxley Act, affects agency costs and how these costs can manifest themselves in economic outcomes. I focus on three things. First, I review the Sarbanes-Oxley Act legislature and point out that the change in the disclosure environment did not involve any large change to the actual rules governing disclosure, but to the enforcement of existing rules. Second, I explore theoretically how these changes to disclosure enforcement would affect both equity and debt investors and how these are evident both in capital markets and in how contracts that govern financing relationships are written. Finally, I explore how the Sarbanes-Oxley Act affected the way in which contracts were written by reviewing a sample of bank lending contracts in the pre- and post-Act period. Although the evidence is largely anecdotal, I provide evidence that Sarbanes-Oxley allowed banks and borrowing firms to substitute away from monitoring through costly covenants to relying on information provided by the stricter disclosure regulation.;In the second chapter, I investigate how the ownership structure of syndicated bans has changed following the implementation of the Sarbanes-Oxley Act. I hypothesize that if the Act has increased firm transparency, information asymmetry between lead arrangers and participant lenders on syndicated bans to public firms reduces in comparison to bans to private firms, allowing lead arrangers to retain smaller shares of these bans. I document that relative to syndicated bans to unaffected private firms, lead arrangers hold a smaller proportion of syndicated bans to public firms following implementation of the Act consistent with greater public firm transparency. Furthermore, I hypothesize that the reduction in information asymmetry due to the Act is conditional on the existing information asymmetry of the loan and the pre-Act disclosure quality of the borrowing firm. I document that the reduction in the lead arranger's share of a syndicated loan is predictably related to a number of loan specific measures of information asymmetry; however, I find no evidence that the effect of the Act is related to prior disclosure quality. This evidence suggests that the Act has increased borrowing firm transparency in the syndicated loan market for public firms.