Trust and Certification in Financial Markets: Evidence from Reactions to Earnings News
53 Pages Posted: 12 Nov 2014 Last revised: 28 Oct 2019
Date Written: October 11, 2019
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: Suggested Citation