Has Section 404 of the Sarbanes-Oxley Act Discouraged Corporate Investment? New Evidence from a Natural Experiment

This paper exploits a quasi-natural experiment to investigate the relation between the Sarbanes–Oxley Act (SOX) of 2002 and corporate innovation: firms with a public float under $75 million can delay compliance with Section 404 of the act. We find a significant decrease in the number of patents and patent citations for firms that are subject to Section 404 compliance relative to firms that are not. This relation is more pronounced when firms are financially constrained and when firms face high litigation risk. Overall, our evidence suggests that SOX imparts real costs to the economy by decreasing corporate innovativeness.

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Anticorruption and Corporate Investment in China: Evidence from a Quasi-Natural Experiment

SSRN Electronic Journal ◽

10.2139/ssrn.3730141 ◽

2020 ◽

Author(s):

Alberto Batinti ◽

Yen Teik Lee ◽

Bingyong Zheng

Keyword(s):

Natural Experiment ◽

Corporate Investment ◽

Investment In China

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Investor Perceptions of Government Deregulation: Evidence from Section 404 of the Sarbanes-Oxley Act

Accounting Horizons ◽

10.2308/horizons-17-176 ◽

2020 ◽

Author(s):

Benjamin W Hoffman ◽

John L. Campbell ◽

Jason L. Smith

Keyword(s):

Financial Reporting ◽

Government Regulation ◽

Abnormal Returns ◽

Reporting Quality ◽

Internal Controls ◽

Litigation Risk ◽

Section 404 ◽

Fraud Risk ◽

Sarbanes Oxley ◽

Public Company

We investigate the stock market's reaction to events leading up to the Securities and Exchange Commission's (SEC) and Public Company Accounting Oversight Board's (PCAOB) 2007 regulatory changes that reduced the scope of and documentation requirements for assessments of firms' internal controls over financial reporting (ICFR), as required by Section 404 of the Sarbanes-Oxley Act. The stated goal of these regulations was to reduce firms' and auditors' compliance costs with mandatory ICFR assessments, while maintaining the effectiveness of these assessments. We examine abnormal returns surrounding key dates leading to the passage of these regulations and offer two main findings. First, investors reacted negatively on key event dates, suggesting that investors viewed the regulations as likely to reduce financial reporting quality rather than to drive firm and audit efficiencies. Second, this negative market reaction is larger when ICFR effectiveness should matter most - when firms are more complex, have higher litigation risk, and greater fraud risk. In additional analysis, we find that restatements increase in the post-regulation time period, consistent with investors' concerns that the effect of the legislation would be a reduction in ICFR effectiveness. Overall, our results may imply that investors prefer stronger government regulation when it comes to the assessments of a firm's internal controls over financial reporting.

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Auditor Tenure and the Timeliness of Misstatement Discovery

The Accounting Review ◽

10.2308/accr-51871 ◽

2017 ◽

Vol 93 (2) ◽

pp. 315-338 ◽

Cited By ~ 18

Author(s):

Zvi Singer ◽

Jing Zhang

Keyword(s):

Natural Experiment ◽

Audit Quality ◽

Client Engagement ◽

Audit Firm ◽

Auditor Tenure ◽

Sarbanes Oxley ◽

Auditor Change ◽

Negative Effect ◽

Extended Analysis ◽

Arthur Andersen

ABSTRACT Using the timeliness of misstatement discovery as a proxy for audit quality, we examine the association between audit firm tenure and audit quality in a setting that alleviates the endogeneity problem endemic to this line of research. We find that longer audit firm tenure leads to less timely discovery and correction of misstatements, which is consistent with a negative effect of long auditor tenure on audit quality. In addition, using the non-voluntary auditor change following the demise of Arthur Andersen in 2002 as a natural experiment, we show that the misstatements of its former clients were discovered faster than those of comparable companies that retained their auditors throughout the misstatement. This finding speaks to the benefit of a fresh look by a new auditor. An extended analysis shows that longer auditor tenure also leads to misstatements of greater magnitudes, and that the Sarbanes-Oxley Act has mitigated, but not eliminated, the negative effect of long auditor tenure. Last, we show that the negative association between auditor tenure and timely discovery of misstatements is mainly present in the first ten years of an audit engagement. Our study has implications for regulators who continue to express concern regarding lengthy auditor-client engagement. JEL Classifications: K22; K23; L51; M41; M42; M48.

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