Market Reactions to Wells Notice: An Empirical Analysis

International Journal of Disclosure and Governance, 11, 2014, 177-193; Available via advance online publication by January 2013

35 Pages Posted: 23 Sep 2008 Last revised: 20 Sep 2014

See all articles by Khalid Nainar

Khalid Nainar

McMaster University - Michael G. DeGroote School of Business

Atul Rai

Wichita State University

Semih Tartaroglu

Wichita State University

Date Written: September 11, 2012

Abstract

Financial reporting scandals earlier in the decade and the recent financial crises have led to various market participants calling for regulatory refinement and stronger enforcement. This paper empirically examines the capital market effects of the disclosure that the SEC had issued Wells Notice to a firm. Statistically significant price reaction of −3.3% is found in a short window around the Wells Notice disclosure. The price reaction is significantly more negative for firms that used higher accruals at the time of alleged violation. The price reaction is more negative when the CEO is also issued a Wells Notice, but is less negative if the settlement is announced with the Wells Notice. Despite the materiality of Wells Notice, we estimate that only one out of every three firms that received Wells Notice discloses this fact to public. These findings contribute to the policy debate regarding disclosure requirements on Wells Notice.

Keywords: Wells Notice, Capital Markets, Fraud, Market Enforcement, Market Regulation

JEL Classification: G15, G18, K22, K42

Suggested Citation

Nainar, S. M. Khalid and Rai, Atul and Tartaroglu, Semih, Market Reactions to Wells Notice: An Empirical Analysis (September 11, 2012). International Journal of Disclosure and Governance, 11, 2014, 177-193; Available via advance online publication by January 2013. Available at SSRN: https://ssrn.com/abstract=1270852 or http://dx.doi.org/10.2139/ssrn.1270852

S. M. Khalid Nainar

McMaster University - Michael G. DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

Atul Rai (Contact Author)

Wichita State University ( email )

1845 Fairmount Avenue
Wichita, KS 67260-0087
United States
316-978-6251 (Phone)
316-978-3660 (Fax)

Semih Tartaroglu

Wichita State University ( email )

Department of Finance, Real Estate & Decision
Sciences (FREDS)
Wichita, KS 67260-0077
United States
(316) 978 7124 (Phone)

Register to save articles to
your library

Register

Paper statistics

Downloads
264
Abstract Views
1,505
rank
114,798
PlumX Metrics