Taking the Oath: Investor Response to SEC Certification Under Sarbanes-Oxley
Contemporary Journal of Accounting and Economics, Vol. 1, pp. 27-63, 2005
Posted: 15 Oct 2004
Abstract
This study investigates the market response to the requirement that the principal executive and financial officer of an SEC registrant each state under oath that the firm's annual and quarterly financial reports are materially accurate and complete pursuant to the Securities Exchange Act of 1934. We hypothesize that investors should recognize the importance of these changes in financial reporting and, thus, respond at or around those events that should reveal the most information about those changes, specifically, the SEC order to certify (June 27, 2002), the passage of the Sarbanes-Oxley Act (July 25, 2002), and the first certification filing by a registrant. We base our measure of investor response primarily on unsigned market-adjusted daily excess return around such events and compare these responses with identical measures for the same companies and reports in prior periods. We also examine investor response based on signed market-adjusted excess return and test for variation in signed and unsigned return based on proxies for litigation cost and the cost of the new requirements. We find that investors did in fact respond on the identified dates, and in the ways hypothesized. Based on these results, we conclude that investors responded to certification and/or Sarbanes-Oxley. The effects we document hence include a response to the Sarbanes-Oxley legislation more generally, which not only mandated certification for all firms but also introduced other provisions as well.
Keywords: Securities and Exchange Commission, SEC certification, Sarbanes-Oxley, stock market response, securities regulation
JEL Classification: G12, G14, G38, G34, K22, M41
Suggested Citation: Suggested Citation