China’s Sarbanes-Oxley Act (China-SOX): Evidence on its Economic Consequences and its Effects on Company Efficiency

Abstract

In 2012, the Chinese version of the Sarbanes-Oxley Act (the China-SOX) was officially enacted. Inspired by the controversies among the US academic and business communities regarding the costs of compliance with the SOX-type legislation, this thesis examines whether the total private benefits of the enactment of China-SOX exceed its total private costs. In this thesis, the China-SOX is evaluated from two perspectives which are: 1) whether market investors perceive the enforcement of China-SOX as beneficial overall as reflected by the movements of stock prices, and 2) whether implementing China-SOX guidelines can lead to an improvement in company productivity and efficiency in the post-China-SOX period. The overall economic consequences of the enactment of China-SOX is examined via an event study which detects if there are significant market returns as well as stock returns around the dates of key China-SOXrelated events during the legislation preparation period. The effect of China-SOX on companies’ productivity and efficiency is examined in a DEA study setting, and Malmquist Index Analysis is conducted to find the productivity and efficiency changes between the pre-China-SOX period and the post-China-SOX period. The event study results provide no evidence to support the claim that the enactment of China-SOX is net beneficial. However, the results show that there are significant negative market returns around one of the China-SOX announcement events. Meanwhile, the results also suggest that, around the dates of the same China-SOX event, the returns of the mainboard listed companies that did not voluntarily disclose internal control audit opinions are significantly lower than the main-board listed companies with such disclosure. Both findings seem to add validity to the concern about the costs of China-SOX’s compliance. The DEA study results provide mixed evidence regarding the effect of China-SOX on company efficiency, as some of the sample industries show an overall efficiency improvement from the pre-China-SOX period to the post-China-SOX period whereas other industries show an overall efficiency decline. Collectively, the results of the event study and the DEA study do not support the claim that China-SOX is net beneficial.