STOCK INVESTORS’ RESPONSE TO DISCLOSURES OF MATERIAL WEAKNESSES IN INTERNAL CONTROL
Vol. 10, Nr. 3/2011 , p397..423
Author(s):
Mirela DOBRE
Keywords:
Bid-ask spread, informed trading, information asymmetry, internal controls, adverse selection cost
Abstract:
There has been some controversy regarding theburden that the Sarbanes-Oxley Section 404 (SOX 404) casts on American publiccompanies and whether the benefits outweigh the costs of compliance. Startingwith November 15, 2004, Section 404 of the Act requires all accelerated firms(with at least $75 million in public equity) to report on the effectiveness oftheir internal controls over financial reporting. Reporting under SOX is meantto improve investor confidence concerning the stock of a specific company byadding credibility to its financial statements. An increase in the quality offinancial information should determine a reduction in information asymmetryamong stock investors, narrowing the bid-ask spread. I use the model developedby Bollen, Smith and Whaley (2004) to separate the cost components of thebid-ask spread for a sample of compliant firms in the period surrounding theimplementation of SOX 404. The expectation is that the passage did have apositive effect, by reducing the bid-ask spread.
Download:
http://online-cig.ase.ro/jcig/art/10_3_6.pdf
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