Paying Attention to Misconduct: Differential Reactions to Misconduct After Sarbanes-Oxley

One of the big questions following the enactment of new corporate legislation is whether it is effective in altering firm behavior. In this paper, we push this question further to investigate how legislation might be effective in altering firm behavior, independent of the coercive nature of legislation and enforcement. We study the impact of the Sarbanes- Oxley Act of 2002 on the behavior of publicly traded firms restating earnings. We find that Sarbanes-Oxley does generate a change in behavior, such that firms are much more likely to take costly remedial action – in the form of firing the Chief Executive Officer or Chief Financial Officer – in the wake of a restatement after the legislation was enacted than they were before. We also find that Sarbanes-Oxley redirects media attention to the problem of restatement, and that this media attention is itself associated with more costly remedial action. Finally, we find that media attention partially mediates the effects of the legislation on firm response, sug...