Firm Location and Corporate Governance Differences: Evidence from the Pre-SOX Environment

摘要

This study examines the effect of U.S. firms' geographic location on their corporate governance practices. Using hand-collected data, this study finds evidence that rural firms are less likely to have CEOs as the chair of the board of directors and more likely to hire Big 4 auditors compared to matched urban firms prior to the implementation of the Sarbanes-Oxley Act of 2002 (SOX). Linguistic analyses of the Management Discussion and Analysis (MD&A) section shows that rural firms' MD&A has a more pessimistic tone than those of the matched urban firms. To understand the implications of corporate governance differences, this study examines whether there are different stock market reactions to urban and rural firms around key event dates relative to the enactment of the SOX. In key SOX events, urban firms experience marginally significant negative market reactions to SOX events compared to rural firms, suggesting that urban firms are perceived to have weaker governance at the top of the organisation when compared to rural firms prior to SOX. Results from this study should be of interest to regulators and investors.