Title

The change in investor reaction to 10-K filings after Regulation Full Disclosure and the Sarbanes–Oxley Act

Abstract

Purpose: The purpose of this paper is to examine whether the investor reaction to 10-K filings has changed since the implementation of Regulation Full Disclosure (FD) and the Sarbanes–Oxley Act (SOX) and examine whether the market still underreacts to 10-K content and exhibits the continuation of filing day returns (FDRs) documented by You and Zhang (2009) after the passage of these regulations.

Design/methodology/approach: The sample consists of 39,270 10-K filings over the sample period of 1996 to 2012. Performance of portfolios created based on FDRs around 10-K filings is examined. Regression models are used for multivariate analysis. Carhart αs are obtained using the four-factor risk adjustment model.

Findings: By comparing investor reaction to 10-K filings pre- and post-regulation, the paper shows a significant change in stock price behavior since the implementation of FD and SOX. Analogous to Burks (2011), results suggest improved price efficiency around 10-K filings. In the long-run of up to one year following the filing, the continuation of FDRs documented by You and Zhang (2009) disappears post-2000, especially after the implementation of SOX. Overall findings suggest that investors price the information in 10-K filings significantly differently after FD and SOX than before.

Research limitations/implications: The sample ends in 2012. Therefore, this study does not examine the implications of the Dodd-Frank Act.

Originality/value: The paper contributes to the literature related to the impact of FD and SOX and market reaction to filings of financial reports. The current literature documents that there is a continuation of FDRs up to a year. This paper shows that the continuation has disappeared since FD and SOX were implemented.

Department(s)

Finance and General Business

Document Type

Article

DOI

https://doi.org/10.1108/MF-02-2019-0100

Keywords

10-K filings, Information credibility, Regulation full disclosure, Sarbanes–Oxley Act (SOX), Stock price behaviour

Publication Date

12-4-2019

Journal Title

Managerial Finance

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