The Effect of SOX Section 404: Costs, Earnings Quality and Stock Prices

73 Pages Posted: 1 May 2007 Last revised: 23 Jul 2016

Peter Iliev

Pennsylvania State University - Department of Finance

Date Written: August 26, 2009

Abstract

This paper exploits a natural quasi-experiment to isolate the effects that were uniquely due to Sarbanes-Oxley Act (SOX): US firms with a public float under $75 million could delay Section 404 compliance, and foreign firms under $700 million could delay the auditor’s attestation requirement. As designed, Section 404 led to conservative reported earnings, but also imposed real costs. Net-in-net, SOX compliance reduced the market value of small firms.

Keywords: Sarbanes-Oxley Act, Section 404, Regression Discontinuity, Audit Fees, Earnings Management, Returns

JEL Classification: G18, G38, K22

Suggested Citation

Iliev, Peter, The Effect of SOX Section 404: Costs, Earnings Quality and Stock Prices (August 26, 2009). Journal of Finance 65 (3), 1163-1196, 2010. Available at SSRN: https://ssrn.com/abstract=983772 or http://dx.doi.org/10.2139/ssrn.983772

Peter Iliev (Contact Author)

Pennsylvania State University - Department of Finance ( email )

348 Business Building
University Park, PA 16802
United States

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