Wednesday, January 04, 2006
Sarbanes-Oxley Disclosures Matter To Investors
Investors punish firms that disclose internal control weakness as required by Sarbanes Oxley provisions, but having a Big Four auditor mitigates the negative price hit, perhaps because post-SOX, the highest quality auditors have the lowest risk client portfolios, new research shows.
The findings, which appear in two separate research papers by Leslie Hodder, assistant professor of accounting at Indiana University's Kelley School of Business, can be seen as an empirical rebuke to arguments that new "SOX" provisions are a waste of firm's time and money on issues that are of no consequence to investors.
"If that's true," Hodder says, "we shouldn't see the market response to a firm's disclosure of material weakness that we did. Instead, our research shows that the market does care."
In a study coauthored with Messod Beneish and Mary Billings, also of Indiana University, Hodder found "significant abnormal negative returns," in the range of 1.5 to two percent of market capitalization, over three trading days for 336 firms that disclosed internal control weaknesses in 2004, as required by SOX regulations.
posted by Brian Moran @ 12:04 PM