Trust and Certification in Financial Markets: Evidence from Reactions to Earnings News

53 Pages Posted: 12 Nov 2014 Last revised: 28 Oct 2019

See all articles by Chishen Wei

Chishen Wei

Singapore Management University - Lee Kong Chian School of Business

Lei Zhang

University of Queensland - Business School

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Date Written: October 11, 2019

Abstract

We show that a lack of investor trust affects the revision of cash flow expectations and delays the incorporation of accounting information into the stock price. To overcome investors’ dependence on trust, managers can obtain external certification—either through credit ratings or by employing reliable auditors. The relation between trust and the reaction to earnings news largely disappears after the passage of the Sarbanes-Oxley Act. Our findings suggest that regulation and certification can decrease investors’ reliance on trust and facilitate faster incorporation of earnings news into the stock price.

Keywords: Trust, Earnings Reactions, Auditor Quality, Sarbanes-Oxley Act

JEL Classification: G12, G14, G18, M41, M49, Z1

Suggested Citation

Wei, Chishen and Zhang, Lei, Trust and Certification in Financial Markets: Evidence from Reactions to Earnings News (October 11, 2019). Available at SSRN: https://ssrn.com/abstract=2469034 or http://dx.doi.org/10.2139/ssrn.2469034

Chishen Wei (Contact Author)

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
Singapore
Singapore

Lei Zhang

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

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