Sarbanes-Oxley Act and corporate credit spreads

•SOX has led to a significant 27 bps structural decline in spreads.•Riskier firms benefited more from passage of SOX.•Firms' aspects related to SOX provisions (e.g., corporate governance) matter.

Stock market reaction suggests that despite improved disclosure and increased accountability, Sarbanes-Oxley Act (SOX) is too costly and not beneficial. Noting that bondholders are likely to reap the many potential benefits of SOX without bearing the brunt of costs, we examine how SOX affected corporate credit spreads to better assess its benefits. SOX has led to a significant structural decline in spreads of at least 27 basis points. Riskier firms (low rating, long maturity, high leverage, and small size) and firms closely related to SOX major provisions (earning variability, managerial trading, and corporate governance) experience greater declines in spreads.