SOX Generated Changes in Board Composition: Have They Impacted Risk-Adjusted Returns‪?‬

Executive Summary This investigation examines the effect on risk-adjusted returns for listed firms attributable to the Sarbanes-Oxley Act of 2002 and associated stock exchange regulations. This analysis also advances the study of effects associated with the use of independent directors, as it employs the difference-in-differences methodology to overcome the endogeneity concerns which have consistently challenged the literature. This is accomplished through examination of the effects on risk-adjusted returns associated with the exogenously forced addition of independent directors to the boards of publicly listed firms. The optimization of risk-adjusted returns is one potential area of board influence. This optimization may be achieved via approval of capital allocations, as well as through their efforts to advise and monitor the CEO. The results obtained reveal that there is a significant negative relationship between firms that were compelled by law to change their boards and their level of risk-adjusted returns, in comparison to firms that had pre-adopted similar changes to their boards.