The Effect of SOX Section 404: Costs, Earnings Quality, and Stock Prices

Iliev, Peter

doi:10.1111/j.1540-6261.2010.01564.x

Cited by 435 publications

(269 citation statements)

References 49 publications

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“…17 Source: NYSE Corporate Governance Rules and NASDAQ Corporate Governance Rules. 18 Foreign firms were also exempt from the independence rules, but we exclude them because they are also exempt from several other transparency requirements of SOX (Iliev, 2010 show similar increases in transparency, and the coefficient on Non-Exempt will not be different from zero. On the other hand, if it is the required change in board structure that causes the change in transparency, then non-exempt firms should have larger increases in transparency than their non-exempt counterparts.…”

Section: Placebo Test Using Firms That Were Exempt From Exchange Regumentioning

confidence: 99%

Do independent directors cause improvements in firm transparency?

Armstrong¹,

Core²,

Guay³

2014

Journal of Financial Economics

376

174

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Recent research finds that firms characterized by high corporate transparency have a greater proportion of independent directors. The direction of the causality of this relation, however, is unclear. One branch of the governance literature takes corporate transparency as fixed and shows that the effective level of board independence is determined by exogenous variation in the information environment. Another branch argues that independent directors can instigate changes in transparency. We examine a regulatory shock that substantially increased board independence for some firms, and find that information asymmetry, and to some extent management disclosure and financial intermediation changed at firms affected by this shock. We also examine the lead/lag relation between changes in board structure and changes in corporate transparency, as well as whether these effects vary as a function of management entrenchment, information processing costs, and when changes to audit committee independence are required. Our results suggest that corporate transparency can be altered to suit the informational demands of a particular board structure. * Corresponding author. We appreciate the comments of an anonymous referee,

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Section: Placebo Test Using Firms That Were Exempt From Exchange Regumentioning

confidence: 99%

Do independent directors cause improvements in firm transparency?

Armstrong¹,

Core²,

Guay³

2014

Journal of Financial Economics

376

174

View full text Add to dashboard Cite

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“…We also control for the effects of SOX-like regulatory changes affecting European financial markets by defining a EU SOX dummy, equal to 1 if the firm's exit decision occurs after the introduction of a SOX-equivalent corporate governance code by one of the four European countries of our sample 9 . Since the increased costs of compliance with SOX are found to have decreased the market value of small firms (Iliev, 2010), the propensity of firms to choose an acquisition, either as initial exit mechanism or post-IPO, might have increased. Finally, we control for the presence of a venture capitalist among the IPO firm's existing shareholders by employing a dummy for VC-backed IPOs.…”

Section: Variablesmentioning

confidence: 99%

Two Stage Exits: An Empirical Analysis of the Dynamic Choice between IPOs and Acquisitions by European Private Firms

2014

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A private firm's exit decision has been modeled in the existing empirical literature as a dichotomous choice between IPO and acquisition. In this paper, we take a dynamic approach and analyze how explicitly accounting for dynamic considerations, such as the benefits arising from being acquired after going public at higher valuations relative to a direct acquisition, or the costs arising from being delisted at lower valuations, alters the initial IPO vs. acquisition trade-off. We find that firms that are more viable against product market competition, characterized by larger private benefits of control and lower information asymmetry, are more likely to choose an IPO over a direct acquisition as initial exit mechanism. These firms are also more likely to be acquired post-IPO, while firms characterized by lower product market viability and higher information asymmetry are more likely to be delisted. We document that two-stage acquisitions are a valuable exit route for firms, that are acquired at a 44.7% premium, on average, compared to the valuation they could have obtained in a direct acquisition. On the other hand, firms that are delisted post-IPO suffer from a 31.9% valuation discount relative to a direct acquisition. The valuation premium is higher for firms with more viable business models and affected by lower information asymmetry. Our evidence indicates that explicitly accounting for the benefits and costs arising from post-IPO considerations will tend to push private firms with higher product market viability and lower information asymmetry more towards choosing an IPO rather than an acquisition as initial exit mechanism.

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“…Black, Black, Christensen, & Heninger, 2012 study the effect of SOX on pro forma earnings disclosures and show that the quality of pro-forma reporting has improved and investors' perceptions of pro forma earnings metrics has changed after the passage of SOX. Iliev, 2010 finds that SOX imposes huge costs on firms but also reports material declines in total accruals and in discretionary accruals following SOX. Kalelkar and Nwaeze, 2011 investigate the extent to which the passage of SOX is associated with more or less investor confidence in earnings and earnings components, with a particular focus on discretionary accruals (which is the component of earnings alleged to be most vulnerable to manipulation).…”

Section: Earnings and Regulatory Changesmentioning

confidence: 99%

“…A number of studies report increases in earnings quality and sharp declines in discretionary accruals in the post-SOX periods (e.g., Lobo & Zhou, 2006, 2010Chang, Fernando, & Liao, 2009;Altamuro & Beatty, 2010;Cohen, Dey, & Lys, 2008;Jain & Rezaee, 2006;Li, Pincus, Olhoft, & Olhoft, 2008). Black, Black, Christensen, & Heninger, 2012 study the effect of SOX on pro forma earnings disclosures and show that the quality of pro-forma reporting has improved and investors' perceptions of pro forma earnings metrics has changed after the passage of SOX.…”

Section: Earnings and Regulatory Changesmentioning

confidence: 99%

The Effect of Regulation on the Relationship between Earnings and Stock Returns

Chichernea

Franz²

2016

AFR

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We document that disclosure and analyst regulatory changes made between 2000 and 2003 significantly diminished the magnitude of the relationship between earnings and market returns. While we observe no significant change in the relationship between returns and earnings components (i.e. cash-flows and accruals), earnings components' persistence has significantly declined post-regulation. We interpret this as evidence that a decrease in earnings quality impacted the strength of the earnings-returns relation. We find no significant change when using an international sample control group, which strengthens the claim that the weakened earnings-returns relation found for the U.S. firms is due to regulatory changes.

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The Effect of SOX Section 404: Costs, Earnings Quality, and Stock Prices

Cited by 435 publications

References 49 publications

Do independent directors cause improvements in firm transparency?

Do independent directors cause improvements in firm transparency?

Two Stage Exits: An Empirical Analysis of the Dynamic Choice between IPOs and Acquisitions by European Private Firms

The Effect of Regulation on the Relationship between Earnings and Stock Returns

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