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We look at the effect of the US Sarbanes-Oxley (SOX) financial regulation on industrial innovation. Our theoretical framework shows it creating immediate uncertainty about its costs and future resolution of cost and managerial performance uncertainty. Real option value is created for investment delay. We construct a panel of patenting data and fit our model to it. We find a dip in patenting after SOX and subsequent medium term recovery, with larger dips for small, risky, and new companies. In the medium term, these companies continue to have relatively lower patenting. Like SOX, the dynamic behaviour is found only to apply to US companies. Our results have implications for policy and analysis.

The Sarbanes-Oxley Act, Industrial Innovation, and Real Option Creation