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News announcement effects of compliance with section 404 of SOX: Evidence from non-accelerated filers

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  • Khedmati, Mehdi
  • Navissi, Farshid
  • Shams, Syed
  • Vinkler, Daniel

Abstract

This study examines the effects of Section 404 of the Sarbanes–Oxley Act of 2002 (SOX) news announcements on a non-accelerated filer's levels of information asymmetry proxied by bid–ask spread. We find that, on average, the information asymmetry decreases (increases) after the announcements of compliance (deferral of compliance) with Section 404 of SOX. While a deferral announcement delays incurring the cost of compliance with Section 404, it signals lack of disclosure of relevant price sensitive information about the effectiveness of internal control systems, leading to higher levels of information asymmetry. Consistently, we find that, on average, prices increase (decrease) in response to the announcements signaling compliance (deferral of compliance) with Section 404 of SOX. Additionally, the results from cross-sectional analyses of abnormal returns indicate that changes in information asymmetry are priced by investors, whereas firm-specific estimates of cost of compliance with Section 404 do not appear to play a significant role in securities.

Suggested Citation

  • Khedmati, Mehdi & Navissi, Farshid & Shams, Syed & Vinkler, Daniel, 2015. "News announcement effects of compliance with section 404 of SOX: Evidence from non-accelerated filers," Journal of Contemporary Accounting and Economics, Elsevier, vol. 11(3), pages 231-244.
    • Handle: RePEc:eee:jocaae:v:11:y:2015:i:3:p:231-244
    DOI: 10.1016/j.jcae.2015.07.003
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    More about this item

    Keywords

    Information asymmetry; Abnormal returns; Sarbanes–Oxley Act; Securities and Exchange Commission; Section 404 of SOX; Non-accelerated filers;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G3 - Financial Economics - - Corporate Finance and Governance
    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting
    • K2 - Law and Economics - - Regulation and Business Law

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