Title

Financial Reporting Credibility after SOX: Evidence from Earnings Restatements

Publication Date

8-5-2010

Abstract

Motivated by regulatory assertions that the purpose of SOX was to restore investor confidence in the securities markets, we examine changes in the stock market reaction to earnings restatements following the implementation of SOX in order to evaluate whether the Act’s reforms have had a significant impact on the credibility of financial reporting. Consistent with speculation that the recent rise in number of restatements and the more subdued market response to restatement announcements can be attributed to SOX, we conjecture that the collective package of reforms imposed by the Act has had a limiting influence on the market response to restatement announcements. We evaluate the effect of SOX by examining three aspects of the stock market response to restatements: (1) announcement-period returns, (2) restatement-induced contagion price effects, and (3) the information content of post-restatement earnings. We find evidence that SOX has had a considerable impact on all three market measures, which supports the idea that the reforms imposed by SOX have had a significant impact on increasing investors’ assessments of reporting credibility for firms admitting to accounting errors.

Document Type

Article

Keywords

Accounting restatements, Sarbanes-Oxley Act, Investor confidence, Valuation effects

Disciplines

Accounting

DOI

10.2139/ssrn.1652982

Source

SMU Cox: Accounting (Topic)

Language

English

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