Information Content of Public Firm Disclosures and the Sarbanes-Oxley Act
University of Texas at Austin
Carnegie Mellon University - David A. Tepper School of Business
Jacob S. Sagi
University of North Carolina Kenan-Flagler Business School
Noah A. Smith
Carnegie Mellon University - School of Computer Science
April 5, 2010
We find evidence that public firm disclosure, in the form of Management Discussion and Analysis (Sections 7 and 7a of annual reports), is more informative about the firm's future risk following the passage of the Sarbanes-Oxley Act of 2002. Employing a novel text regression, we are able to predict, out of sample, firm return volatility using the Management Discussion and Analysis section from annual 10-K reports (which contains forward-looking views of the management). Using the relative performance of the text model as a proxy for the informativeness of reports, we show that the MD&A sections are significantly more informative after the passage of SOX. We further show that this additional information is associated with a reduction in share illiquidity, suggesting that the information divulged was new to investors. Finally, we find that the increase in informativeness of MD&A reports is most pronounced for firms with higher costs of adverse selection.
Number of Pages in PDF File: 35
Keywords: Disclosure, text analysis, Sarbanes-Oxley Act of 2002, volatility forecast
JEL Classification: G19working papers series
Date posted: April 5, 2010
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