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

Mehdi Khedmati, Farshid Navissi, Syed Mohammod Mostofa Shams, Daniel Vinkler

Research output: Contribution to journalArticleResearchpeer-review

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.
Original languageEnglish
Pages (from-to)231 - 244
Number of pages14
JournalJournal of Contemporary Accounting and Economics
Volume11
Issue number3
DOIs
Publication statusPublished - 2015

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