This study examines whether the internal control provisions under the Sarbanes–Oxley 
Act (SOX) have a disciplining effect on the governance structures of firms. We 
find that audit committee members and outside directors of firms that disclose 
material weaknesses (MWs) under Section 302 of SOX are more likely to leave the 
firms compared to their counterparts in a matched sample of control firms 
without such weaknesses, and they lose more outside directorships than their 
counterparts in the control firms. These results are consistent with the notion 
that the labor market imposes reputational penalties for internal control 
failures. Although the MW firms have weaker governance structures than the 
control firms prior to the MW detection, they show significantly greater 
improvement in governance structures than the control firms following the 
detection of these weaknesses. We also find that the market reacts positively to 
the improvement in audit committee size and board independence, suggesting that 
the improvement restores investor confidence in financial reporting. Overall, 
the results in this study show that the internal control provisions of SOX have 
a disciplining effect on the governance structures of firms.