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The effect of the Sarbanes-Oxley Act on industrial innovation – evidence from patenting of stem cell technologies

Waters, James (2013): The effect of the Sarbanes-Oxley Act on industrial innovation – evidence from patenting of stem cell technologies.

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Abstract

This paper assesses how financial regulation, in the form of the Sarbanes-Oxley Act (SOX), affects industrial innovation. We describe the decision faced by an investor considering an innovative project before, at the time of, and subsequent to SOX. SOX is shown to create a real option value for investment delay through its short term hike and medium term diminution in uncertainty, and we calculate how implementation parameters impact on delay and subsequent innovation. To test our model’s implications, we examine patenting in stem cell technologies from 2001 to 2009, introducing two methods of endogenously detecting changes in patenting rates. We find a post-SOX dip in patenting consistent with our model, and no long term effect on innovation. We reject US government funding cuts to human embryonic stem cell research as a cause of the observed behaviour, as well as five other sets of explanations.

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