After the US Congress passed the Sarbanes-Oxley Act in 2002, US companies were forced to overhaul their systems of corporate governance. A raft of changes were introduced. Auditors were required report to audit committees, audit committee had to comprise directors who were independent from the firm, at least one member of the audit committee had to be a financial expert, CEOs and CFOs were required to certify financial statements and loans to insiders were prohibited. Boards were required have a majority of independent directors and compensation and nominating committees needed to be composed entirely of independent directors.

Now a new study by Raymond L Posey at Mount Union College suggests the changes might have had an impact on the share price of some companies.

The study, Do SOX-related changes in Corporate Governance Practices Affect Stock Returns?, found that companies that had to change many practices seemed to be viewed by investors as less valuable. Maybe this was because investors believed their management and history still affected their board practices, culture, and governance environment. This result was consistent for the year 2006, and for the three and five year periods, all ending with 2006. In other words, the lower returns might reflect their previous weaknesses with corporate governance.

The question is whether the impact of governance changes on share price performance will continue. One could argue that it might decline as better governance practices get embedded in the company's culture. Watch this space.