A Study of Firms Surrounding the Threshold of Sarbanes-Oxley Section 404 Compliance

Advances in Accounting, Forthcoming, 2012

52 Pages Posted: 7 Aug 2007 Last revised: 16 Jan 2012

See all articles by Maria E. Nondorf

Maria E. Nondorf

University of Colorado at Boulder - Leeds School of Business

Zvi Singer

HEC Montreal

Haifeng You

Hong Kong University of Science & Technology (HKUST) - Department of Accounting

Date Written: February 20, 2011

Abstract

This study examines firms surrounding the Sarbanes-Oxley Section 404 market value compliance threshold. We hypothesize that firms around the compliance threshold will behave opportunistically to reduce their market value to avoid compliance with Section 404. We examine a sample of firms with market float surrounding the compliance threshold in the period 2004-2005 and find evidence to support our hypothesis. We document that firms around the threshold reduce their market value temporarily during threshold measurement quarters, whereas control firms experience increasing market value, while in the following quarters market value is increasing. Dampened stock returns and insider trading function to reduce the float. We consider this opportunistic evidence of regulatory avoidance, confirming small firms’ beliefs regarding the net costs of the regulation. Additionally, we find that the likelihood of avoidance increases with the power of the CEO and decreases with the strength of the monitoring of the CEO, which suggest that avoidance is more likely to happen in firms with poor corporate governance mechanisms.

Keywords: Sarbanes-Oxley Section 404, Regulatory Avoidance, Small Firms

JEL Classification: G34, G38, G32

Suggested Citation

Nondorf, Maria E. and Singer, Zvi and You, Haifeng, A Study of Firms Surrounding the Threshold of Sarbanes-Oxley Section 404 Compliance (February 20, 2011). Advances in Accounting, Forthcoming, 2012, Available at SSRN: https://ssrn.com/abstract=1004965 or http://dx.doi.org/10.2139/ssrn.1004965

Maria E. Nondorf (Contact Author)

University of Colorado at Boulder - Leeds School of Business ( email )

Boulder, CO 80309-0419
United States
3037354390 (Phone)

Zvi Singer

HEC Montreal ( email )

3000, Chemin de la Côte-Sainte-Catherine
Montreal, Quebec H2X 2L3
Canada
514-340-1847 (Phone)

Haifeng You

Hong Kong University of Science & Technology (HKUST) - Department of Accounting ( email )

Clear Water Bay
Kowloon
Hong Kong

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
494
Abstract Views
2,997
rank
62,909
PlumX Metrics