The Effect of Section 404 of the Sarbanes-Oxley Act on Financial Reporting Quality

56 Pages Posted: 14 Jan 2008 Last revised: 16 Jan 2012

See all articles by Zvi Singer

Zvi Singer

HEC Montreal

Haifeng You

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

Date Written: April 30, 2009

Abstract

In this paper we study the effect of Section 404 of the Sarbanes-Oxley Act on earnings quality. Using a difference-in-differences method we find that firms that were required to comply with Section 404 during the first two years of its implementation improved the quality of their financial reporting more than control firms that were not required to comply. Our testing results also provide some evidence that the reduction in intentional misstatement contributes to the improvement in financial reporting quality of complying firms. Investor confidence appears to be restored, in that they react more strongly to earnings surprises of complying firms than to those of the control firms in the post-404 period. These results are robust to various sensitivity tests. Our results suggest that Section 404 helped to achieve the main goal of the Act: protecting investors and restoring their confidence in the stock market by improving the accuracy and reliability of corporate disclosure.

Keywords: Section 404 of the Sarbanes-Oxley Act, Earnings Quality, Internal Control, Investor Confidence

JEL Classification: G14, G30, G38, K22, M41

Suggested Citation

Singer, Zvi and You, Haifeng, The Effect of Section 404 of the Sarbanes-Oxley Act on Financial Reporting Quality (April 30, 2009). Journal of Accounting, Auditing and Finance, Vol. 26, No. 3, 2011. Available at SSRN: https://ssrn.com/abstract=1052541 or http://dx.doi.org/10.2139/ssrn.1052541

Zvi Singer (Contact Author)

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

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