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

Rakesh Bharati, Susan Crain and Shrikant Jategaonkar

Managerial Finance, 2019, vol. 46, issue 1, 120-138

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 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.

Keywords: Information credibility; 10-K filings; Regulation full disclosure; Sarbanes–Oxley Act (SOX); Stock price behaviour; G10; G14; M48 (search for similar items in EconPapers)
Date: 2019
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