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A study of firms surrounding the threshold of Sarbanes-Oxley Section 404 Compliance

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Published: 20 Jun 2012

Authors: Nondorf, Maria E.; Singer, Zvi; You, Haifeng

Abstract:

This study examines whether firms surrounding the Sarbanes-Oxley Section 404 market value compliance threshold behave opportunistically to reduce their market value to avoid compliance with Section 404. We find evidence that those firms reduce their market value temporarily during threshold measurement quarters, whereas control firms experience increasing market value. We find strong evidence of dampened stock returns and some evidence of insider trading as means to reduce the float. Additionally, we find that downward earnings management is used as a mechanism to alter investors' expectations of firm value in order to temporarily reduce stock prices. We consider this opportunistic evidence of regulatory avoidance. Finally, we find that the likelihood of avoidance increases with the power of the CEO and decreases with the strength of the monitoring of the CEO, which suggest that avoidance is more likely to happen in firms with poor corporate governance mechanisms. © 2012 Elsevier Ltd.

Advances in Accounting, June 2012

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