Information Content of Public Firm Disclosures and the Sarbanes-Oxley Act

35 Pages Posted: 5 Apr 2010  

Shimon Kogan

Interdisciplinary Center (IDC) Herzliyah - Adelson School of Entrepreneuship; University of Texas at Austin - Red McCombs School of Business

Bryan Routledge

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

Date Written: April 5, 2010

Abstract

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.

Keywords: Disclosure, text analysis, Sarbanes-Oxley Act of 2002, volatility forecast

JEL Classification: G19

Suggested Citation

Kogan, Shimon and Routledge, Bryan and Sagi, Jacob S. and Smith, Noah A., Information Content of Public Firm Disclosures and the Sarbanes-Oxley Act (April 5, 2010). Available at SSRN: https://ssrn.com/abstract=1584763 or http://dx.doi.org/10.2139/ssrn.1584763

Shimon Kogan (Contact Author)

Interdisciplinary Center (IDC) Herzliyah - Adelson School of Entrepreneuship ( email )

P.O. Box 167
Herzliya, 46150
Israel

University of Texas at Austin - Red McCombs School of Business ( email )

Austin, TX 78712
United States
512-232-6826 (Phone)

Bryan R. Routledge

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
(412) 268-7588 (Phone)
(412) 268-7064 (Fax)

Jacob Sagi

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

HOME PAGE: http://public.kenan-flagler.unc.edu/faculty/sagij/

Noah A. Smith

Carnegie Mellon University - School of Computer Science ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213
United States

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