AN EX-POST EVALUATION OF SARBANES-OXLEY ACT ON FIRMS' INTRINSIC VALUE: A PRINCIPAL-AGENT FRAMEWORK

The Sarbanes-Oxley Act of 2002 (SOX) is viewed as the regulatory solution to accounting and financial scandals that creates a way of re-aligning the goals and behavior of the manager - agent and auditor-agent with those of the shareholder-principal to maximize the firm 's intrinsic value, true returns and risk. A principal-agent model with multiple agents and risk considerations is developed and empirical tests are used to evaluate the effectiveness of SOX. This framework seems to explain auditor-agent and manager-agent behavior in issuing accurately stated financial statements, implying the use of less aggressive earnings management strategies. Relative to the pre-SOX period, the new principal-agent relationship appears to explain greater goal congruence in the post-SOX period.

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