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A Study of Firms Surrounding the Threshold of Sarbanes-Oxley Section 404 Compliance
Maria E. Nondorf University of California, Berkeley - Accounting Group Zvi Singer McGill University - Desautels Faculty of Management Haifeng You Hong Kong University of Science & Technology (HKUST) - Department of Accounting October 31, 2007 AAA 2008 Financial Accounting and Reporting Section (FARS) Paper Abstract: This study examines firms surrounding the Sarbanes-Oxley Section 404 market value compliance threshold. We predict that management will behave opportunistically to affect their firm's market value in order to temporarily fall below the threshold. We find evidence that sample firms reduce their market value only during threshold measurement quarters, while control firms experience increasing market value. For threshold firms, dampened stock returns and insider trading function to reduce float. We consider this evidence of regulatory avoidance, confirming managers' beliefs regarding the net costs of the regulation. Additionally, we find that firms with the ability and incentives to avoid Section 404 do so.
Keywords: Sarbanes-Oxley Section 404, Regulatory Avoidance, Small Firms JEL Classifications: G34, G38, G32 Working Paper SeriesDate posted: August 07, 2007 ; Last revised: January 17, 2008Suggested CitationContact Information
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