Financial Reporting Credibility after SOX: Evidence from Earnings Restatements

46 Pages Posted: 5 Aug 2010  

Mark Hirschey

University of Kansas

Kevin R. Smith

Utah Valley University

Wendy M. Wilson

Texas Christian University - Department of Accounting

Date Written: August 3, 2010

Abstract

Motivated by regulatory assertions that the purpose of SOX was to restore investor confidence in the securities markets, we examine changes in the stock market reaction to earnings restatements following the implementation of SOX in order to evaluate whether the Act’s reforms have had a significant impact on the credibility of financial reporting. Consistent with speculation that the recent rise in number of restatements and the more subdued market response to restatement announcements can be attributed to SOX, we conjecture that the collective package of reforms imposed by the Act has had a limiting influence on the market response to restatement announcements. We evaluate the effect of SOX by examining three aspects of the stock market response to restatements: (1) announcement-period returns, (2) restatement-induced contagion price effects, and (3) the information content of post-restatement earnings. We find evidence that SOX has had a considerable impact on all three market measures, which supports the idea that the reforms imposed by SOX have had a significant impact on increasing investors’ assessments of reporting credibility for firms admitting to accounting errors.

Keywords: Accounting restatements, Sarbanes-Oxley Act, Investor confidence, Valuation effects

JEL Classification: M41, M48, G34

Suggested Citation

Hirschey, Mark and Smith, Kevin R. and Wilson, Wendy M., Financial Reporting Credibility after SOX: Evidence from Earnings Restatements (August 3, 2010). Available at SSRN: https://ssrn.com/abstract=1652982 or http://dx.doi.org/10.2139/ssrn.1652982

Mark Hirschey

University of Kansas ( email )

School of Business
1300 Sunnyside Ave.
Lawrence, KS 66045-7585
United States
785-864-7563 (Phone)
785-864-5328 (Fax)

HOME PAGE: http://www.business.ku.edu/gen/bschool_generated_pages/Hirschey_Mark_p2272.html

Kevin R. Smith (Contact Author)

Utah Valley University ( email )

800 West University Parkway
Orem, UT 84058
United States

Wendy M. Wilson

Texas Christian University - Department of Accounting ( email )

M.J. Neeley School of Business
TCU Box 298530
Fort Worth, TX 76129
United States

Paper statistics

Downloads
363
Rank
65,885
Abstract Views
1,885