Sarbanes-Oxley Disclosures Matter To Investors

By | February 10, 2006

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.”

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