The Private Securities Litigation Reform Act (PSLRA), Sarbanes Oxley & Large Firm Risk

This study empirically evaluates the impact of the Private Securities Litigation Reform Act of 1995 (PSLRA) and the Sarbanes Oxley Act of 2002 upon the (equity) risk of the largest US firms, the backbone of the US economy. Drawing from the literature, hypotheses are developed and empirically evaluated using an extensive data set: daily return data between 1993 and 2009 from a representative sample of the largest European and US firms. This represents one of the first studies to evaluate the risk implications of the PSLRA, while research on Sarbanes Oxley has produced inconclusive — at times contradictory — findings. Strong evidence is provided that the PSLRA had no significant risk impact, and that Sarbanes Oxley significantly reduced firm risk — measured as mean equity variance. Findings also suggest that Sarbanes Oxley’s risk impairment effect may be enhanced for the largest 2.5% of US firms