The Effect of SOX Section 404: Costs, Earnings Quality and Stock Prices

Abstract:     
This paper exploits a natural quasi-experiment to isolate the effects that were uniquely due to Sarbanes-Oxley Act (SOX): US firms with a public float under $75 million could delay Section 404 compliance, and foreign firms under $700 million could delay the auditor’s attestation requirement. As designed, Section 404 led to conservative reported earnings, but also imposed real costs. Net-in-net, SOX compliance reduced the market value of small firms.

Keywords: Sarbanes-Oxley Act, Section 404, Regression Discontinuity, Audit Fees, Earnings Management, Returns

JEL Classifications: G18, G38, K22

Working Paper Series