Sarbanes Oxley Act And Its Effect On Market Liquidity

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Market liquidity proves to be important to both investors and sellers worldwide. Liquidity refers to the relationship between the speed of the sale, and the price of the sale. Liquid markets have buyer ask prices relatively similar to seller ask prices, making this a preferable situation for both the investor and the seller (Abella, 2016). The Sarbanes Oxley Act in 2002 incentivized institutions to keep more accurate and attainable records of business. The Act being based off of the fraudulent activity of several high profile companies (eg. Enron), was put in place to better monitor and record a companies transactions, improve management style, and promote ethically responsible behavior in the workplace (Keneth, 2015). Our main purpose is…show more content…
Each measurement was calculated from TAQ data. Both Table 1 and Table 2 represent 1%, 5%, and 10% significance levels with ***,**, and * respectively. As represented in table 2, researchers were able to determine SOX had a significant impact in the long-term (90+ days). While quoted spread and share depth show little change immediately after SOX, both measures improve as time passes. This supports the conclusion that markets actually improved as time passed with respect to liquidity. After 270 days of SOX implementation, share depth (the volume of pending orders) improved by 1060 shares, and adverse selection component of spreads was lowered by 1.1 cents.
In addition, table 1 details the results of the model “∆Quoted spread or ∆Effective spread = β0 + β1 ∆(TACC/TA) + β2 ∆(1/Price) + β3 ∆Return volatility + β4 ∆Log(Dollar trading volume) + β5 ∆Log(Market value of equity) + ε” created by the same researchers who formed table 2. The effective spread is the average effective percentage spread at time t while quoted spread is the average quoted spread at time t. The change is calculated from subtracting pre-SOX averages from post-SOX averages. Data was sampled from 588 firms over three years (from January 1, 2001 to December 31, 2004). The main significant variable is the change in volatility. This variable shows a statistically significant change at the 1% level. After the passage of SOX, market
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