Do Companies With Effective Internal Control Over FR Benefit From SOX Section 302 and 404

Article
Journal of Accounting,
Auditing & Finance
Do Companies With Effective 2018, Vol. 33(2) 200–227
ÓThe Author(s) 2016
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Financial Reporting Benefit DOI: 10.1177/0148558X16663091
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From Sarbanes–Oxley
Sections 302 and 404?
Parveen P. Gupta1, Heibatollah Sami1, and Haiyan Zhou2
Abstract
Post-SOX (Sarbanes–Oxley Act) academic research on internal control focuses on the char-
acteristics of publicly listed companies disclosing material control weaknesses or the conse-
quences experienced by these companies. However, to date, limited research has
empirically examined whether these new disclosures truly enhance ‘‘public interest’’ by pro-
moting ‘‘equity’’ in the capital markets through enhanced information distribution. In this
article, we empirically investigate the impact these disclosures have on information asym-
metry and related market micro-structure. We hypothesize that both the management’s
and the auditor’s reporting on internal control provide outside investors additional and
higher quality information about a firm’s future prospects, thereby reducing the information
asymmetry in capital markets. Such reduction in information asymmetry should be reflected
in decreased bid-ask spreads and price volatility, as well as increased trading volume. Our
cross-sectional analyses show that, subsequent to the management’s report on internal con-
trol per Section 302, the information environment improves for U.S. firms as manifested by
decreased bid-ask spread and price volatility, and increased trading volume. However, we
find no similar results subsequent to the auditors’ reporting on a company’s internal control
over financial reporting. In our time-series intervention analyses, about 70% of sample firms
have experienced significant and permanent reductions in their bid-ask spreads subsequent
to the implementation of Section 302 of SOX, in contrast to only 30% of firms subsequent
to the implementation of Section 404 of SOX. Our findings point to the public policy issue
of whether financial reporting quality of public companies can be improved at a lower cost.
Keywords
accounting disclosure, information asymmetry, bid-ask spread, trading volume, price
volatility, cost–benefit, Sarbanes–Oxley Act
1
Lehigh University, Bethlehem, PA, USA
2
University of Texas–Rio Grande Valley, Edinburg, TX, USA
Corresponding Author:
Parveen P. Gupta, Department of Accounting, College of Business and Economics, Lehigh University, 621 Taylor
Street, RBC #37, Bethlehem, PA 18015, USA.
Email: ppg0@lehigh.edu
Gupta et al. 201
Introduction
Post-Sarbanes–Oxley Act (hereinafter SOX or the Act) academic research on internal con-
trol focuses on the characteristics of the companies disclosing material control weaknesses
or the consequences flowing to public companies from such disclosures (Schneider,
Gramling, Hermanson, & Ye, 2009). However, to date, limited research has empirically
examined whether these new disclosures truly enhance ‘‘public interest’’ by promoting
‘‘equity’’ (Lev, 1988) in the U.S. capital markets through enhanced information distribu-
tion. In this article, we attempt to empirically examine and document the impact these dis-
closures have on information asymmetry and related market micro-structure to promote
‘‘equity’’ in U.S. capital markets.
The motivation to examine the impact of internal control over financial reporting
(ICFR) disclosures on market micro-structure comes from the fact that there are documen-
ted social consequences of inequity in capital markets. Lev (1988) argues that ‘‘inequity in
capital markets resulting from information asymmetry can and does occur, and that its
social consequences in the form of high transaction costs, thin markets, low liquidity and,
in general–decreased gains from trade, are indeed very undesirable’’ (p. 3).1 Lev’s theory is
based on the premise that in the presence of information asymmetry in the capital markets,
uninformed investors are compelled to take protective measures to protect themselves from
losing to informed investors. These measures include, but are not limited to: buying and
holding diversified portfolios for a long time; restricting market participants in possession
of inside information from trading on that information; or—in extreme cases—simply with-
drawing from the markets. In Lev’s (1988) view,
A massive withdrawal of uninformed investors from the market will strip the informed of the
benefits of their costly-acquired information (thereby decreasing incentive for information pro-
duction), and will deprive the economy of the allocational and risk sharing benefits of large
and efficient capital markets. (p. 7)
Lev (1988) cites research studies, such as the ones conducted by Glosten and Milgrom
(1985), that clearly demonstrate adverse economic consequences that occur when unin-
formed investors take protective measures by directly linking information asymmetry to
market characteristics such as bid-ask spread, transaction costs, and trading volume. In this
article, we use some of the similar measures to test what, if any, impact the ICFR disclo-
sures have on market micro-structure.
Section 302 of the SOX requires, for the first time in U.S. corporate governance history,
that public companies file ICFR certifications with the U.S. Securities and Exchange
Commission (SEC). Concurrently, Section 404 requires, also for the first time, that both the
management (404a) and the external auditors (404b) of public firms with more than US$75
million in free float express separate opinions on the effectiveness of their company’s
ICFR.2 The Act was signed into law on July 31, 2002. Although Section 302 internal con-
trol requirements took effect less than one month after the passage of the Act, Section 404
internal control provisions were only applied to accelerated filers with more than US$75
million in free float with fiscal years ending on or after November 15, 2004.
More specifically, Section 302 of the Act requires a company’s management to
acknowledge their responsibility for establishing and maintaining adequate ICFR and to
certify its effectiveness in a company’s annual report as of its fiscal year-end. In addition,
Section 404(a) of the Act mandates that a company’s management conduct an annual
202 Journal of Accounting, Auditing & Finance
assessment and report on the effectiveness of its ICFR. To guard against the ‘‘moral
hazard’’ in complying with the Section 302 and 404(a) requirements by management,
Section 404(b) imposes discipline on registrant management by requiring that a company’s
independent auditors must also separately assess and certify the effectiveness of their com-
pany’s ICFR. This report by a company’s external auditor is in addition to the already
existing auditor’s report that expresses an opinion on the fairness of a company’s fiscal
year-end financial statements in accordance with the U.S. generally accepted accounting
principles (GAAP). Whether a company’s internal control over its financial reporting is
effective is determined by the absence of a material weakness as defined in the related
SEC Final Rules (as amended) for implementing Section 404.
Hence, management’s certification on the effectiveness of ICFR under Section 302 and
both management’s and auditor’s reports on the effectiveness of ICFR under Section
404(a) and (b) provide an additional level of assurance and possibly value-relevant
information—which was not previously available to the investors—on the reliability of a
company’s financial statements and disclosures. Disclosure of this new information should
presumably increase the overall quality and quantity of a firm’s accounting disclosures and
reduce the information asymmetry among a firm’s capital market participants.
Recent studies examined the determinants of internal control deficiencies and their
impact on a firm’s earnings quality (Doyle, Ge, & McVay, 2007a; Mitra, Jaggi, & Hossain,
2013; Singer & You, 2011), accruals quality (Doyle, Ge, & McVay, 2007b; Kalelkar &
Nwaeze, 2011), stock prices and returns (Beneish, Billings, & Hodder, 2008; Gupta &
Nayar, 2007), cost of capital (Ashbaugh-Skaife, Collins, & Lafond, 2009; Beneish et al.,
2008; Kim & Park, 2009; Kim, Song, & Zhang, 2011; Ogneva, Subramanyam, &
Raghunandan, 2007), audit committee quality and auditor independence (Zhang, Zhou, &
Zhou, 2007), and audit risk assessment (Elder, Zhang, Zhou, & Zhou, 2009). However, as
mentioned above, few research studies have empirically investigated what, if any, impact
the disclosure of management’s assessment and auditor’s reporting on internal control has
had on companies’ information environment within the U.S. capital markets.3 Gupta,
Weirich and Turner (2013) provide extensive historical context and commentary, conclud-
ing that ICFR disclosures, especially auditor certification of a company’s ICFR under
Section 404(b), continue to be a point of contention among the supporters and the detrac-
tors of the SOX legislation. While the supporters of the ICFR disclosures contend that
finally the time had come to regulate these disclosures, the detractors argue that this
accounting regulation was a ‘‘knee jerk’’ reaction that has inflicted irreparable harm on
U.S. capital markets. Thus, following Lev’s (1988) theory, an important research question
arises
– Does this accounting regulation promote public interest by mitigating the social
consequences of inequity in the U.S. capital markets?
The lack of direct research on this important connection between information asymmetry
in the capital markets and these new disclosures motivated us to perform this research
study.
Thus, our research study contributes to the literature by filling this important gap. Given
that most studies examine the determinants of internal control deficiencies and their impact
on accounting information quality (Doyle et al., 2007a, 2007b; Kalelkar & Nwaeze, 2011;
Singer & You, 2011) and capital markets (Ashbaugh-Skaife et al., 2009; Beneish et al.,
2008; Gupta & Nayar, 2007; Kim & Park, 2009; Kim et al., 2011; Ogneva et al., 2007), the
Gupta et al. 203
comparison of the information environment between pre- and post-SOX periods for firms
without material control weakness in their internal controls makes this research study
uniquely different from other post-SOX research on internal control.
We hypothesize that management’s assessment, certification, and disclosure of ICFR
effectiveness and the auditor’s independent evaluation and report on ICFR each has the
potential to separately increase the quality and quantity of disclosure, consequently reduc-
ing the information asymmetry in the capital markets. As argued by Lev (1988), increased
quality and quantity of disclosure should decrease information asymmetry among investors
through equal access to information, which should result in lower transaction costs as
reflected in bid-ask spreads. The increased accounting disclosures by a firm should reduce
information asymmetry, not only between the firm and its shareholders but also among
potential traders (Leuz & Verrecchia, 2000).
To study the effect of these new disclosures on market micro-structure, we focus on the
sample of firms with clean Section 302 management certifications and clean Section 404(a)
and (b) reports. In other words, for our sample firms, the management certifies that the
firm’s ICFR was effective, and the auditor’s opinion states that the client maintained effec-
tive ICFR. Consequently, we investigate the incremental improvement in firms’ informa-
tion environment due to the newly released information through ICFR reports. We call
such firms ‘‘compliant’’ firms in this article. We exclude ‘‘non-compliant’’ firms because
the information environment of firms with material weaknesses introduces confusion in iso-
lating the true effect of the ICFR disclosures on market micro-structure.
The evidence presented in this article supports our arguments relating to reduction in the
information asymmetry due to Section 302 certification and related disclosures by the man-
agement but not for Section 404(a) and (b) disclosures. In cross-sectional analyses, we find
that, subsequent to the first-time management disclosure on internal control via Section
302, bid-ask spread decreased, trading volume increased, and price volatility decreased for
our sample companies. However, we do not find similar results subsequent to the first-time
implementation of Section 404. In time-series intervention analyses, we examine whether
bid-ask spreads have permanently and significantly decreased subsequent to the adoption of
Section 302 and Section 404 of SOX for those firms subject to the Act. We find that about
70% of companies in our sample experienced a significant and a permanent reduction in
their bid-ask spreads subsequent to the implementation of Section 302. However, only
about 30% of the firms experienced a significant and a permanent reduction subsequent to
the implementation of Section 404 of SOX.4
These findings may lead the detractors of Section 404 to call into question whether
Section 404 benefits outweigh the costs, especially for the compliant firms. We explain the
non-significance of the Section 404 findings by suggesting that during the sample period,
capital markets overreacted by overly trusting management’s certification under Section
302 because at that time company managements were increasingly under ‘‘fire’’ both from
the public and the regulators to ‘‘stand behind’’ the disclosed numbers in their financial
reports. Another possible explanation for our findings is that the market participants may
have already factored into account the impact of the discipline to be imposed on company
managements under soon to be forthcoming Section 404 requirement, thereby leading capi-
tal markets to place more trust and confidence in management’s Section 302 certifications.
As such, when the Section 404 certifications by the auditors were actually made available
to the market participants for the first time, they were appropriately discounted because
their effect was taken into account earlier. Alternatively, it is plausible that Section 404 dis-
closures do not reduce information asymmetry in the capital markets beyond what is
already affected by the Section 302 disclosures because Section 906 provides ‘‘teeth’’ to
Section 302 certifications by imposing significant personal penalties on a company’s finan-
cial management when it issues misstated Section 302 reports. In other words, the potential
discipline that auditor certification under Section 404(b) imposes on management’s certifi-
cation regime under Section 404(a) is mitigated by Section 906 due to the threat of jail
time for management certifications.
Thus, our study also contributes to the literature by separately examining the impacts of
Section 302 and Section 404 on information asymmetry in capital markets. At least, within
the context of the ‘‘compliant firms,’’ our findings do raise a public policy issue of whether
financial reporting quality of the companies listed on U.S. exchanges can be improved at a
lower cost.
The remainder of this article is organized into six sections. In Section ‘‘ICFR and SOX
302 and 404,’’ we provide a brief overview of the internal control disclosure requirements
to be followed by both a company’s management and its external auditor under SOX and
the relevant SEC and the Public Company Accounting Oversight Board (PCAOB) rules
and standards. Section ‘‘Disclosure Regulation and Information Asymmetry’’ describes the
relationship between disclosure regulation and information asymmetry, and develops
hypotheses. Section ‘‘Sample Selection’’ discusses the sample selection criteria. The statis-
tical methods employed are presented in Section ‘‘Method.’’ The results are discussed in
Section ‘‘Results,’’ including sensitivity analyses. Finally, in Section ‘‘Summary and
Conclusions,’’ we draw conclusions and discuss possible public policy implications.
ICFR and SOX 302 and 404

In response to a series of accounting scandals, such as Enron and WorldCom, the U.S.
Congress enacted the SOX of 2002 to restore investor confidence by requiring public com-
panies to strengthen corporate governance through a number of mechanisms, including
enhanced disclosure on ICFR. As claimed by regulators, the disclosures on the effective-
ness of ICFR are aimed at improving the quality of financial reporting, which would in
turn reduce the information asymmetry for investors in U.S. capital markets (Donaldson,
2003).
Together, Sections 302 and 404(a) of SOX require companies to assess, report, and cer-
tify the effectiveness of their internal controls over financial reporting. Section 404(b) fur-
ther requires external auditors to audit these internal controls and express an opinion on
their effectiveness alongside management’s assessment and certification. This represents
the first time that independent auditors are required to formally audit the internal controls
over financial reporting and report publicly on the results of that audit, since in the pre-
SOX era, auditors only performed tests of controls in a limited scope, primarily in planning
the audit.
In addition to Section 404, Section 302 of SOX requires a company’s top management
to certify the fair and truthful presentation of quarterly and annual reports. The certification
includes the statement of top management on its responsibilities of fairly and truthfully rep-
resenting financial information in all material respects, establishing, maintaining, and eval-
uating controls over financial reporting, and disclosing any significant deficiencies and
material weaknesses to external auditors, audit committees, and the public.
Section 906 prescribes disciplinary actions and imposes criminal penalties against com-
panies and their senior management members for providing misleading and fraudulent cer-
tifications and financial disclosures. Section 906 is typically referred to as providing
Gupta et al. 205
‘‘teeth’’ for Section 302 and Section 404(a) requirements. The evidence for a nearly direct
benefit of internal control disclosures comes from prominent credit rating services in the
United States. For instance, both Moody’s Investor Services and Fitch Ratings, in October
2004 and January 2005, respectively, indicated their approaches to evaluating the SOX
reports and to determining the effects of material weaknesses on credit ratings (Fitch
Ratings, 2005; Moody’s Investor Services, 2004).
Despite the benefits alleged by regulators (see, for example, Nicolaisen, 2004), many
capital market constituents including public companies are concerned with the significant
increase in the compliance cost (Solomon, 2005). For example, in a survey of 224 compa-
nies conducted in July 2004, the Financial Executives International (FEI), a professional
organization representing the interests of financial executives, reported that companies
spent an average of US$3 million to comply with the internal control requirements of
Section 404. The same survey revealed that audit fees were expected to increase, on aver-
age, by 53% for attestation services pertaining to ICFR. Other than these direct ‘‘out-of-
pocket’’ costs, there were also concerns about the internal costs to get a company’s systems
ready for review and attestation, as well as concerns about the indirect costs of distracting
top management of the firm from the important decisions regarding operating and investing
activities.
The issue of cost versus benefit is not yet settled. While the SEC’s Office of Economic
Analysis in a 2009 study acknowledged the high cost of implementing internal control
requirements, it concurrently suggested that the benefits outweigh the costs without provid-
ing any hard evidence to support its claim (SEC, 2009).
To ease the implementation of the Section 404 internal control rules, the SEC continued
to grant a postponement of the management’s and auditor’s reports on internal controls, as
firms of various sizes have been unable to meet the various deadlines. For example, the
accelerated filers with fiscal years ending between and including November 15, 2004, and
February 28, 2005, were allowed to amend their 10-K filings (annual financial reports)
with management’s internal control reports (Section 404 [a]) and related auditor’s certifica-
tion (Section 404(b)) up to 45 days after the filing deadline for their 10-K (SEC, 2004).
Similarly, the SEC extended the deadlines several times for the non-accelerated filers until
Section 989G(a) of the Dodd–Frank Act finally exempted them from auditor certification
requirements under Section 404(b).5
However, even before the implementation of Section 404, many firms began to disclose
all sorts of control deficiencies in their internal controls over financial reporting in anticipa-
tion of Section 302 requirements. For example, for the 12 months preceding October 2004,
a total of 329 companies disclosed about 968 internal control weaknesses in various peri-
odic filings to the SEC (Gupta & Leech, 2005). Further analysis of these control deficien-
cies indicates that from the enactment date of SOX to November 2004, at least 261
companies disclosed a material weakness in their ICFR, which extends to more than 500
by March 2005 (Solomon, 2005). This is different from the pre-SOX era, in which compa-
nies were required to report a material weakness in internal controls in 8-K filings to the
SEC only when they filed 8-K Forms about accounting restatements and/or changes in
auditors (Krishnan, 2005; SEC, 1988).
Thus, public reporting on ICFR is a major focus of the changes in disclosure regulations
mandated by SOX. The studies on ICFR have recognized internal control as an important
element of a company’s financial reporting and disclosure structure (e.g., Kinney, Maher,
& Wright, 1990). However, due to lack of available data, the academic literature prior to
SOX had ignored the issue of internal control quality and its impact on the information
asymmetry in U.S. capital markets. The paucity of empirical research in this important area
was the direct result of the lack of robust internal control standards prior to SOX and the
consequent absence of systematic disclosures about internal control in a company’s public
filings.
Recent studies in this research stream investigate the market reaction to ICFR disclo-
sures and isolate the characteristics of firms with significant deficiencies in internal control.
Doyle et al. (2007a) investigate the determinants of internal control deficiencies for a
sample of 261 firms from August 2002 to November 2004, and find that firms with signifi-
cant deficiencies in internal control are smaller, more complex, suffering a loss, growing
faster, or more likely to be undergoing restructuring than control firms. They also find that
such firms have lower earnings quality.
Doyle et al. (2007b) examine the impact of material weakness on accrual quality by
using a sample of 705 companies with at least one material weakness and find poor quality
of accruals for such firms. Gupta and Nayar (2007) examine a sample of 90 firms making
control deficiency disclosures from March 2003 to July 2004. They find a significant nega-
tive market return for this sample on the date of the internal control weakness disclosures.
Beneish et al. (2008) investigate the impact of material weakness disclosures under
Sections 302 and 404 on the security abnormal returns and cost of capital. They find a neg-
ative association for Section 302 regarding abnormal return and an increase in cost of capi-
tal, but no significant impact on either of the measures for Section 404. Kim and Park
(2009) examine whether negative market reaction is less pronounced for firms whose inter-
nal control disclosures reduce market uncertainty. For their sample of 394 internal control
weakness disclosures in 2004 under Section 302, they find a significant negative associa-
tion between abnormal stock returns and changes in market uncertainty as measured by
changes in the standard deviation of daily stock returns. Ogneva et al. (2007) investigate
the impact of internal control weakness, reported in first-time reports per Section 404, on
firms’ cost of equity capital. They find no direct association after controlling for firm
characteristics.
On the contrary, Ashbaugh-Skaife et al. (2009) use unaudited pre-SOX disclosures and
SOX 404 auditor opinions on internal control to assess how quality of a firm’s internal con-
trol structure over its financial reporting affects a firm’s risk and cost of equity capital.
They find that firms reporting internal control weaknesses have significantly higher ‘‘idio-
syncratic risk, systematic risk, and cost of equity capital’’ (Ashbaugh-Skaife et al., 2009, p.
1). In a separate study, Singer and You (2011) find that after compliance with Section 404,
reporting quality and the association between earnings surprise and abnormal return
increased for complying firms, compared with a sample of Canadian firms listed in the
U.S. markets that did not have to comply with Section 404. In the area of cost of debt and
other debt contract provisions, Kim et al. (2011) use a sample of firms with (without) dis-
closure of weakness in internal control under Section 404 of SOX to investigate the impact
of such a weakness on the cost of debt and other debt contract provisions. They find that
firms which reported weaknesses in internal control under Section 404 of SOX have signif-
icantly higher loan spread and tighter non-price terms compared with those firms without
weaknesses. In addition, their results show that severity of reported internal control weak-
ness significantly increases the loan rate.
A few studies also examine the general impact of SOX, via improvements in ICFR dis-
closures, on earnings quality and/or market performance of companies. Kalelkar and
Nwaeze (2011) provide market-based evidence of the impact of SOX on earnings and
accruals quality. They find that valuation weights of earnings and earnings components
Gupta et al. 207
increase reliably after the passage of the SOX. Cohen, Dey, and Lys (2008) and Bartov and
Cohen (2009) find that earnings management did decrease after the passage of SOX, sug-
gesting that SOX helps to enhance the corporate governance and lower the level of corpo-
rate misconduct. Lobo and Zhou (2010) compare dual-listed Canadian firms and their
domestic counterparts, and find that firms subject to SOX are more conservative in finan-
cial reporting in the post-SOX period as evidenced by lower signed discretionary accruals.
Hossain, Mitra, Rezaee, and Sarath (2011) show that in the pre-SOX years, the implicated
firms by SEC for backdating stock options have higher abnormal accruals than non-impli-
cated firms while in the post-SOX period, the difference in accruals management between
the two groups becomes insignificant. Zhang et al. (2007) examine 208 firms that disclose
material control deficiencies from November 15, 2004, to July 31, 2005. They find that
firms with less financial expertise on their audit committee and more independent external
auditors are more likely to be associated with internal control weakness disclosures. They
also find that firms with more recent auditor changes are also associated with internal con-
trol weaknesses. Heflin and Hsu (2008) find that subsequent to the SOX regulations, firms
are less likely to use non-GAAP financial disclosures to increase the likelihood their dis-
closed earnings meet or beat forecasts. Li, Pincus and Rego (2008) find significantly posi-
tive stock returns associated with events that resolved uncertainty about the SOX’s final
provisions.
Overall, results from these studies are consistent with the expectation that at the individ-
ual firm level, the internal control disclosures do improve the reliability of financial reports
by constraining earnings management and enhancing corporate governance. However, no
studies to date have attempted to investigate the impact of Sections 302 and 404 on infor-
mation asymmetry in U.S. capital markets. Our study fills this glaring void.
Disclosure Regulation and Information Asymmetry

The economic link between the accounting disclosure and the market micro-structure
evolves from the notion that a firm’s increased quality and levels of disclosure would
reduce the information asymmetry among market participants and between the firm and its
investors (Leuz & Verrecchia, 2000; Lev, 1988). According to Lev (1988), this reduction
of information asymmetry is critical to investors, as the existence of information asymme-
try leads to inequity in capital markets, resulting in adverse social consequences. Citing
vast literature on equity, fairness, and justice, Lev argues that policy makers are increas-
ingly motivated by equity considerations while deliberating accounting or any other regula-
tion. To evaluate the public interest aspect of any accounting and disclosure regulation,
Lev draws on the vast literature on equity, fairness, and justice, and proposes a broader def-
inition of equity that focuses on equality of opportunity. He observes that
a major characteristics of equality of opportunity is that it is an ex ante concept of equity, as

opposed to the more familiar ex post concepts of justice that call for equality of outcomes . . .
The main attraction of the ex-ante equality of opportunity concept is that it conflicts less with
efficiency incentives than do the egalitarian ex post concepts of equity. Equalizing opportuni-
ties allows for more incentives to work and invest than does equalizing actual income or
wealth. (Lev, 1988, p. 4)
Applying this notion to capital markets and information disclosure leads one to conclude
that to increase capital market efficiency, accounting disclosure should strive to reduce
information asymmetry by endowing all market participants with the same information set.
Any mechanism that leads to the equalization of opportunity in the markets, through equal
access to information, will be superior to any mechanism that leads to the equalization of
outcomes across various market participants. In finance and accounting literature, there are
a number of theoretical and empirical studies on the effect of accounting disclosure on
information asymmetry in the capital markets. As discussed earlier, bid-ask spreads are
considered a strong proxy for evaluating the efficiency of any new accounting information
in promoting equity in the capital markets.
The link between information asymmetry and bid-ask spread can be traced back to
Demsetz’s (1968) theory on the securities’ transaction cost and Bagehot’s (1971) theory on
informed traders and liquidity traders. According to these theories, the dealer expects to
gain from trades with liquidity traders and lose from trades with informed traders, as
informed traders only trade when they benefit from it. Thus, to optimize her profit, the
dealer sets the bid-ask spread that maximizes the difference between the gains from trades
with liquidity traders and the losses from trades with informed traders (Coughenour &
Shastri, 1999). In particular, when the dealer perceives a greater information asymmetry
risk—a greater likelihood of trading with informed traders—the dealer tends to increase the
adverse selection component of bid-ask spread (Callahan, Lee, & Yohn, 1997). Therefore,
higher information asymmetry is associated with higher bid-ask spread, suggesting that
increased disclosure that leads to lower information asymmetry should be reflected in
lower bid-ask spreads. Other theoretical models on bid-ask spread and information flow
usually suggest that the public disclosure of accounting information should decrease the
information asymmetry in capital markets (Diamond, 1985; Verrecchia, 1982).
Empirical studies in the accounting disclosure literature have investigated the permanent
impact of accounting disclosure on information asymmetry in the market. Using bid-ask
spread as proxy for information asymmetry, Hagerman and Healy (1992) document a
decrease in spreads subsequent to disclosures pursuant to the SEC insider trading rules.
Similarly, Raman and Tripathy (1993) report that disclosure of reserve-based, present-value
information reduces the spreads for firms in the extractive petroleum industry, which is
consistent with Boone (1998). Using a time-series research design, Greenstein and Sami
(1994) find that firms initially implementing SEC disclosure requirement of segment data
experienced a decrease in their spreads, and the magnitude of this decrease in spreads is
positively associated with the number of segments. In prior literature (Lang & Lundholm,
1993; Leuz & Verrecchia, 2000), trading volume and price volatility have also been used
as measures of information asymmetry. Consistent with the perception that International
Accounting Standards (IAS) and U.S. GAAP have higher disclosure quality than German
GAAP, Leuz and Verrecchia (2000) document lower relative spreads and higher trading
volume for firms using either IAS or U.S. GAAP but fail to document a reduction in price
volatility. In addition, Easley, Kiefer, O’hara, and Paperman (1996) referenced in Leuz and
Verrecchia (2000, p. 99) ‘‘show that the probability of information-based trading is
decreasing in trading volume.’’ The economic link between accounting disclosure and
information asymmetry as reflected in spreads also finds evidence in voluntary disclosure
studies using analyst disclosure ratings, such as Healy, Hutton, and Palepu (1999) and
Heflin, Shaw, and Wild (2005). Overall, these findings provide evidence for the theoretical
models in Verrecchia (1982) and Diamond (1985), indicating that increased disclosure
could decrease the information asymmetry in the market.
As discussed previously, the requirements of Sections 302 and 404 of SOX mark the
first time that management is required to report on internal control effectiveness in periodic
reports to investors. The auditor’s opinion on the effectiveness of ICFR is also available for
Gupta et al. 209
the first time to all investors. To the extent that ICFR disclosures make previously undi-
sclosed valuable information public, the information asymmetry should decrease. In other
words, SOX provides investors equal access to information regarding the effectiveness of a
firm’s ICFR. In turn, this helps investors in assessing risks associated with the reliability of
a company’s financial reporting. Therefore, we propose the following hypotheses separately
for Section 302 and Section 404 requirements (in alternative form):
Hypothesis 1 (H1): Firms with ‘‘clean management reports’’ would experience sig-
nificant reductions in information asymmetry following their first compliance with
Section 302 of SOX internal control disclosure requirements.
Hypothesis 2 (H2): Firms with ‘‘clean auditor opinions’’ would experience signifi-
cant reductions in information asymmetry following their first compliance with
Section 404(a) and (b) of SOX internal control disclosure requirements.
Sample Selection
We start with companies included in Audit Analytics database. We need a set of ‘‘clean’’
opinion firms as our empirical sample to test the two hypotheses derived above. There are
2,289 firms with the implementation information on both Section 302 and Section 404 of
SOX.6 These firms are then subjected to the following screening criteria: (a) availability of
bid-ask quotes, trading volume, and the return data on Center for Research in Security
Prices (CRSP) before and after the implementation of the internal control provisions; and
(b) availability of sufficient data for companies to calculate beta. We use 50 weeks before
the disclosure date but require at least 30 weeks. This yields 3,750 firm-year observations
for our analyses of Section 302 first-time disclosures and 3,672 firm-year observations for
our analyses of Section 404 first-time disclosures. From this initial sample, we further elim-
inate 410 firm-year observations under Section 302 and 436 firm-year observations under
Section 404 with unclean reports under Section 302 and/or Section 404. We label a report
‘‘unclean’’ if it contains any control deficiency disclosure. These sample selection proce-
dures leave us with 3,262 firm-year observations for Section 302 analyses with clean
Section 302 and Section 404 reports, and 3,236 firm-year observations for Section 404
analyses with clean Section 302 and Section 404 reports.
The final samples consist of first-time complying firms with clean reports by both the
registrant’s management and its external auditors on their ICFR under Sections 302 and
404. Thus, any changes found in the information environment of these firms can be attrib-
uted to the direct effect of implementing, for the first time, Section 302 and Section 404
internal control requirements. Sample selection procedures are summarized in Table 1.
Method
We use a cross-sectional design to test our hypotheses. The cross-sectional design is less
prone to the confusion between the news effect and the information asymmetry effect
(Leuz & Verrecchia, 2000). As in Aitken and Frino (1996) and Leuz and Verrecchia
(2000), the following models are used to study the cross-sectional effect of increased
accounting disclosure as proposed in H1 and H2:
SPREADi = a0 + a1 PERIOD + a2 MVi + a3 TURNOVERi + a4 VARi + ei , ð1Þ

Table 1. Sample Selection Procedure for Cross-Sectional Analyses.
Number of firm-year Number of firm-year

Number of observations observations
Sample selection procedure companies for SOX 302 for SOX 404
Companies with the implementation 5,344
information on Section 302 of SOX
Companies with the implementation 2,496
information on Section 404 of SOX
Companies with the first-time 2,289
implementation information on both
Sections 302 and 404 of SOX
Companies with bid and ask prices, 1,875 3,750
trading volume, returns, and closing
price information available from CRSP
for the period before and after the
implementation of Section 302 of SOX
Companies with bid and ask prices, 1,836 3,672
trading volume, returns, and closing
price information available from CRSP
for the period before and after the
implementation of Section 404 of SOX
Less observations with unclean reports (410)
under Sections 302 and 404
Firm-year observations with clean reports 3,262
under Section 302
Less observations with unclean reports (436)
under both Sections 302 and 404
Firm-year observations with clean reports 3,236
under both Sections 302 and 404
Note. Parenthetical values denote a deduction. SOX = Sarbanes–Oxley Act; CRSP = Center for Research in
Security Prices.
TURNOVERi = a0 + a1 PERIOD + a2 MVi + a3 VARi + ei , ð2Þ
VARi = a0 + a1 PERIOD + a2 MVi + a3 BETAi + ei , ð3Þ
where SPREAD = average weekly relative bid-ask spread in the pre-adoption period or
post-adoption period, with the pre- or post-adoption period defined as 50 weeks before
(after) the first-time disclosure of the management report under Section 302 of SOX on the
effectiveness of ICFR in fiscal year 2002, and as 50 weeks before (after) the first-time dis-
closure of audit opinion under Section 404 of SOX on the effectiveness of ICFR for fiscal
year 2004; PERIOD = 1 if the observation is from post-adoption period, and 0 otherwise;
MV = logarithm of average weekly market value of the firm’s equity in the pre-adoption
period or post-adoption period; TURNOVER = average weekly share turnover in the pre-
adoption period or post-adoption period. Share turnover is defined as the dollar amount of
trading volume divided by the market value of the firm; VAR = average of weekly standard
deviation of daily returns in the pre-adoption period or post-adoption period; BETA = sys-
tematic risk of company i, estimated with weekly returns in the pre-adoption period or
post-adoption period; and e = the error term.
Table 2. Descriptive Statistics of Regression Variables.
Section 302 first-time implementation (n = 3,262) Section 404 first-time implementation (n = 3,236)
Variables Sample M SD Median M SD Median
SPREAD All 0.8161 0.6775 0.6262 0.2739 0.3323 0.1554
PERIOD = 0 1.0407 0.7538 0.8261 0.2603 0.3343 0.1408
PERIOD = 1 0.6002*** 0.5092 0.4389*** 0.2879** 0.3297 0.1728***
VAR All 0.0249 0.0140 0.0207 0.0173 0.0069 0.0157
PERIOD = 0 0.0277 0.0144 0.0232 0.0171 0.0066 0.0158
PERIOD = 1 0.0223*** 0.0139 0.0184*** 0.0176 0.0072 0.0157
TURNOVER All 6.0772 6.0288 4.2159 6.6499 5.8732 4.9712
PERIOD = 0 5.9240 5.8746 4.0861 6.8685 5.8872 5.1215
PERIOD = 1 6.2244* 6.1719 4.4042* 6.4246** 5.8523 4.7361***
MV All 13.5323 1.5458 13.3382 13.9557 1.5318 13.7890
PERIOD = 0 13.5196 1.5589 13.3559 14.0030 1.5414 13.8595
PERIOD = 1 13.5445 1.5335 13.3212 13.9070 1.5209 13.7134*
BETA All 1.2502 0.7537 1.1268 0.9800 0.5110 0.9235
PERIOD = 0 1.2471 0.7363 1.1314 0.8916 0.4946 0.8277
PERIOD = 1 1.2531 0.7703 1.1214 1.0709*** 0.5118 1.0166***
Note. Definition of variables: SPREAD = average weekly relative bid-ask spread in the pre-adoption period or post-adoption period, with the pre- or post-adoption period
defined as 50 weeks before (after) the first-time disclosure of management report under Section 302 of SOX on the effectiveness of internal control over financial reporting for
fiscal year 2002, and as 50 weeks before (after) the first-time disclosure of audit opinion under Section 404 of SOX on the effectiveness of internal control over financial
reporting for fiscal year 2004; PERIOD = 1 if the observation is from post-adoption period and 0 otherwise; VAR = average weekly standard deviation of daily returns in the pre-
adoption or post-adoption period; TURNOVER = average weekly share turnover in the pre-adoption or post-adoption period (share turnover is defined as the trading volume
divided by total shares outstanding); MV = average weekly market value of the firm’s equity in the pre-adoption or post-adoption period (in logarithm); BETA = systematic risk of
firm i, estimated with weekly returns in the pre-adoption or post-adoption period; SOX = Sarbanes–Oxley Act.
***, **, * The difference is significant at .01, .05, and .10 levels (two-tailed test), respectively. We use t test for the difference in the mean between different periods and the
Wilcoxon test for the difference in the median between different periods.
211
The average weekly relative spread is calculated as the difference between ask price and
bid price divided by their average. We calculate average weekly relative bid-ask spread
separately for the pre-adoption period or post-adoption period, with the pre- or post-adop-
tion period defined as 50 weeks before (after) the first-time disclosure of management
report under Section 302 of SOX on the effectiveness of ICFR in the year 2002, and as 50
weeks before (after) the first-time disclosure of audit opinion under Section 404 of SOX on
the effectiveness of ICFR for fiscal year 2004. We use 10-Q date for Section 302 and 10-K
annual report release dates for Section 404. Both data are from Audit Analytics database.
The 302 compliance dates are from 10-Q (majority), 10-QSB, 10-K, 10-KSB, and 20-F.
The 404 compliance dates are from 10-K (majority) and 10-K/A. We include trading
volume (TURNOVER) and price volatility (VAR), as the literature documents a relationship
between trading activity, price volatility, and spreads, and the former two are also used as
major measures of information asymmetry in the literature (e.g., Copeland & Galai, 1983).
Like most cross-sectional studies in disclosure literature, we use a dummy variable,
PERIOD, to identify the effect of implementing SOX on the bid-ask spread, trading
volume, and price volatility. This dichotomous variable takes the value of 1 during the
post-adoption period and 0 otherwise. In addition, we include firm size (MV) to control for,
at least partially, the firm’s information environment (Leuz & Verrecchia, 2000).
Results
Empirical Results
Descriptive statistics for sample firms are shown in Table 2.7 The results of univariate tests
for Section 302 indicate that for our sample firms (based on t test), bid-ask spread and
price volatility are significantly lower, and trading volume is significantly higher in the
post-adoption period when compared with the pre-adoption period. These results suggest
that implementation of SOX 302 requirements did reduce the information asymmetry in the
capital markets. The results based on the Wilcoxon test for the differences in the median
are consistent with those of t-test results.
Similarly, Table 2 shows the results of the univariate tests for the analyses of Section
404 of SOX. These results, based on t test, show that for our sample firms, there are statis-
tically significant increases in the bid-ask spread, reductions in trading volume, but no
changes in price volatility after the implementation of the Section 404 requirements. In
addition, t tests show a significant increase in firms’ systematic risks in the post-implemen-
tation period of Section 404. Based on the Wilcoxon test, the results for the differences in
the median are consistent with those of t test. Caution should be exercised in interpreting
these results because the univariate test provides evidence regarding the effect of each vari-
able in isolation, while multivariate analysis provides evidence regarding the effect of each
variable in the presence of other variables. For instance, bid-ask spread and the changes in
its magnitude could be driven by other factors such as market value, trading volume, and/
or price volatility. Hence, the multivariate results tend to provide a better basis for drawing
any conclusions.
Table 3 presents the Pearson correlation coefficients for the variables used in the cross-
sectional analyses. All correlation coefficients between the independent variables are below
.5, indicating that collinearity is not a serious problem, except for a correlation of .634
between BETA and VAR, and a correlation of .518 between BETA and TURNOVER in
Panel A. In both panels, MV (firm size) is highly negatively correlated with SPREAD, with
Gupta et al. 213
Table 3. Pearson Correlation Coefficients for Variables.
Panel A: Variables Used in the Analysis of the Implementation of Section 302 of SOX.
Variables SPREAD PERIOD VAR TURNOVER MV BETA
SPREAD 1.000
.000
PERIOD 2.325 1.000
\.0001 .000
VAR .337 2.193 1.000
\.0001 \.0001 .000
TURNOVER 2.295 .025 .416 1.000
\.0001 .199 \.0001 .000
MV 2.544 .008 2.291 .140 1.000
\.0001 .677 \.0001 \.0001 .000
BETA 2.092 .004 .634 .518 .082 1.000
\.0001 .834 \.0001 \.0001 \.0001 .000
Panel B: Variables Used in the Analysis of the Implementation of Section 404 of SOX.
Variables SPREAD PERIOD VAR TURNOVER MV BETA
SPREAD 1.000
.000
PERIOD .042 1.000
.030 .000
VAR .205 .031 1.000
\.0001 .104 .000
TURNOVER 2.332 2.037 .442 1.000
\.0001 .048 \.0001 .000
MV 2.636 2.031 2.446 .125 1.000
\.0001 .103 \.0001 \.0001 .000
BETA 2.227 .175 .477 .349 2.006 1.000
\.0001 \.0001 \.0001 \.0001 .741 .000
Note. See definitions of variables in Table 2. SOX = Sarbanes–Oxley Act.
the Pearson correlation coefficient equal to 2.544 and 2.636, respectively. This negative
correlation indicates that larger firms tend to have lower spreads, because of (a) higher
trading activities, which in turn give informed traders less time to profit from informed
trading with liquidity traders (Greenstein & Sami, 1994); and (b) a larger analyst following
and more media coverage, which leads to a lower level of concentration of private informa-
tion (Chiang & Venkatesh, 1988). Hence, the inclusion of firm size (MV) in the models is
appropriately justified because it is necessary to control, at least partially, for the firm’s
information environment (Leuz & Verrecchia, 2000).
In Table 4, we show the cross-sectional regression results of the impact of first-time
internal control disclosures under Section 302 and Section 404. For Section 302 firms in
our sample, the bid-ask spread model in Panel A is highly significant. It explains about
38% of the variation in spread. As expected in H1, the coefficient on the dummy variable
for the post-event period (PERIOD) in the bid-ask spread model is negative and significant
at p = .01 level. This result indicates that internal control effectiveness certification
Table 4. Cross-sectional Regression Results: The Impact of the Implementation of Sections 302 and
404 of SOX on Bid-Ask Spread Trading Volume and Price Volatility.
Panel A: Bid-Ask Spread Model.

SOX 302 first-time implementation SOX 404 first-time implementation
Variables Sign Coefficient t statistics Coefficient t statistics.
Constant 4.727*** 44.69 2.172*** 45.15
PERIOD 2 20.460*** 217.67 0.004 0.36
VAR + 0.156*** 2.93 0.169*** 3.91
TURNOVER 2 20.019*** 210.74 20.012*** 216.08
MV 2 20.293*** 237.52 20.131** 238.45
F statistics 502.97*** 472.24***
Adjusted R2 38.11% 36.82%
Panel B: Trading Volume Model.

Variables Sign Coefficient t statistics Coefficient t statistics
Constant 0.283 0.28 1.898* 1.64
PERIOD + 0.631*** 2.52 –0.162 –0.65
VAR + 2.571*** 5.01 0.956 0.93
MV + 0.465*** 6.22 0.389*** 4.79
F statistics 21.50*** 8.04***
Adjusted R2 1.85% 0.65%
Panel C: Price Volatility Model.

Variables Sign Coefficient t statistics Coefficient t statistics.
Constant 0.198*** 5.73 0.070*** 3.56
PERIOD 2 20.026*** 23.08 0.005 1.21
MV 2 20.012*** 24.66 20.004*** 22.68
BETA + 20.001*** 23.21 20.0005 21.24
F statistics 14.04*** 3.45**
Adjusted R2 1.18% 0.23%
Note. See definitions in Table 2. SOX = Sarbanes–Oxley Act.

***, **, * Significant at .01, .05, and .10, respectively (one-tailed for variables with an expected sign and two-tailed
otherwise).
disclosures under Section 302 indeed result in a significant reduction in the bid-ask spread.
In other words, the disclosure of internal control effectiveness information does help
reduce the information asymmetry for all companies in our sample. All other coefficients
also have the expected sign. Price volatility (VAR) has a significant positive coefficient,
and trading volume (TURNOVER) has a significant negative coefficient, which is consistent
with prior studies (Aitken & Frino, 1996; Copeland & Galai, 1983). Size (MV) has a nega-
tive and significant coefficient, indicating that larger firms tend to have lesser information
asymmetry than smaller firms (Leuz & Verrecchia, 2000).
Gupta et al. 215
As expected in H1, in the trading volume model (Panel B of Table 4) the coefficient on
the dummy variable PERIOD is significantly positive. This suggests that the increased dis-
closure resulting from the implementation of Section 302 requirements helped build a
thicker or more liquid market, which is argued by Lev (1988) to be one of the important
social benefits of increased accounting disclosure. More liquid markets allow ‘‘the econ-
omy of the allocational and risk sharing benefits’’ (p. 7). All other coefficients for the
sample firms also have the expected sign, indicating that trading volume increases with
price volatility and firm size, which is consistent with the findings reported in the prior lit-
erature (e.g., Leuz & Verrecchia, 2000).
In the price volatility model (Panel C of Table 4), as expected in H1, the coefficient on
the dummy variable, PERIOD, is significantly negative, suggesting that the increased dis-
closure on internal control effectiveness under Section 302 helps to reduce price volatility
in general. We also find that MV and BETA are significantly related to price volatility;
although, compared with expectation, the coefficient of BETA has the opposite sign.
In Table 4, we also present the cross-sectional regression results on the impact of imple-
menting Section 404 for the first time. For our sample firms, the bid-ask spread model in
Panel A shows statistically significant results by explaining about 37% of the variation in
the spread. However, contrary to our expectation, the coefficient on the dummy variable
for the post-event period (PERIOD) in the bid-ask spread model is positive and insignifi-
cant. This suggests that ICFR disclosures under Section 404(a) and (b) have somewhat neg-
ligible impact on the bid-ask spreads. Although insignificant, these results indicate that the
auditor assurance on a company’s ICFR in the presence of clean Section 302 certification
by the management did not help to reduce information asymmetry, at least for our sample
firms.
These results do not support H2; however, there can be many possible explanations for
these findings. One, the firms in our sample already have a rich information environment
subsequent to Section 302 disclosures, which makes it difficult to detect the impact of the
subsequent disclosures under Section 404. Two, the moral hazard implied in Section 302
management certifications that motivated the auditor discipline through Section 404 might
have improved the effect of Section 302 while mitigating any effect from Section 404.
Three, the moral hazard implied in Section 302 management certifications is sufficiently
mitigated by the enhanced criminal penalties imposed on a company’s management through
Section 906 of the SOX. Section 906 of the SOX prescribes significant monetary fines and
personal consequences ranging from US$1 million to US$5 million and jail terms anywhere
from 10 to 20 years or both for management’s failure to accurately certify the disclosures
under Section 302. As expected, all other coefficients are statistically significant and con-
sistent with previous research findings that document a negative relationship between trad-
ing activity and spread (e.g., Copeland & Galai, 1983), a positive relationship between
price volatility and spread (Aitken & Frino, 1996), and a negative relationship between
firm size and spread (Leuz & Verrecchia, 2000).
In Panel B of Table 4, the dummy variable PERIOD is negative and again insignificant
for our sample firms. Information asymmetry literature, as cited earlier, would rather pre-
dict a positive and statistically significant coefficient for the dummy variable PERIOD in
the trading volume model. However, we do not find any significant changes in the trading
volume subsequent to the implementation of Section 404. Consequently, our results again
do not support H2. Although for the other two variables (VAR and MV) the coefficients
have the expected positive sign, only firm size (MV) is statistically significant, which is
consistent with prior research (e.g., Leuz & Verrecchia, 2000).
In Panel C of Table 4, we report the results of the price volatility model. Here the coeffi-
cient on the dummy variable PERIOD is, once again, positive and statistically insignificant,
suggesting that there is no change in price volatility subsequent to the ICFR disclosures
under Section 404, indicating lack of support for H2. Like the previous two models, we find
that in this model the coefficient of MV is negative and significant as expected.
Additional tests. It is possible that managers’ clean SOX 302 reports are only credible in
our sample because investors know the sample firms will be subject in the very near future
to auditors’ SOX 404 independent certification reports. Hence, this may be a possible
explanation for SOX 302 results (as a contributing factor). To further address this issue, we
analyze the non-accelerated filers separately for SOX 302.8 We use both market capitaliza-
tion and free float to define the non-accelerated filers. The results for both definitions of
the non-accelerated filers are reported separately in Tables 5 and 6. The additional tests
indicate that non-accelerated filers show significant and negative impact of the ICFR dis-
closures on bid-ask spread. We also find that trading volume and price volatility have sig-
nificantly increased after the implementation of SOX 302 for these non-accelerated filers,
with the exception of an insignificant result for trading volume when non-accelerated filers
are defined with free float less than US$75 million dollars. Note that the results are weaker
when we use free float as the definition of non-accelerated filers, which results in signifi-
cantly reduced sample size and, perhaps, reduced power of our tests. This suggests that the
increased disclosure resulting from the implementation of Section 302 requirements helped
reduce transaction cost and build a thicker or more liquid market. Thus, based on the
results for bid-ask spread and trading volume, information asymmetry also improved for
the non-accelerated filers as a result of the Section 302 ICFR certifications. These results,
with the exception of those for price volatility, lend credibility to findings for the acceler-
ated filers under Section 302.
As further sensitivity tests, we use share price and free float in place of MV as control
variables. Also, we try using log of bid-ask spread and trading volume as well as average
and median weekly bid-ask spread as a sensitivity check. We include financial analyst fol-
lowing (in the logarithm of the number of financial analysts following) and firm growth
(the ratio of market value to book value of equity) as additional control variables in the
cross-sectional model. The results with these alternative model specifications are qualita-
tively the same as reported.9
The confounding effects of dismissal of Arthur Andersen (AA) could also occur in our
sample period. AA was investigated by the Justice Department starting in early 2002 and
indicted in September 2002. Their clients switched to other auditors within this period of
time, which suggests that the uncertainty due to having AA as an external auditor, if any,
would be reduced during that period of time. This indicates a bias against finding a reduc-
tion in a later period. Nevertheless, we delete the observations on firms who were audited
by AA in fiscal year 2001, and the results are qualitatively the same as reported.
We also use a time-series intervention design to test our hypotheses as the time-series
intervention approach helps to control for the influence of time trend in the market liquidity
and test the permanent reduction in the information asymmetry (Greenstein & Sami, 1994;
Zhou, 2007). There are three types of transfer functions in time-series analyses—(a) an
abrupt, constant change; (b) a gradual, constant change; and (c) an abrupt, temporary
change—that are documented in the statistics literature (McCain & McCleary, 1979; Wei &
Reilly, 1990). The influence of time trend would exhibit a gradual, constant change pattern
rather than an abrupt change in bid-ask spread, if it exists at all. However, if there are
Gupta et al. 217
Table 5. Cross-sectional Regression Results: The Impact of the Implementation of Section 302 on
Bid-Ask Spread, Trading Volume, and Price Volatility for Non-Accelerated Filers (Market Capitalization
Less Than US$75 Million, n = 1,376).

SOX 302 first-time implementation
Variables Sign Coefficient t statistics
Constant 15.1713*** 42.64
PERIOD ? 20.507*** 29.01
VAR + 0.017 0.13
TURNOVER 2 20.036*** 24.92
MV 2 21.195*** 234.49
F statistics 354.67***
Adjusted R2 50.93%

Constant 0.881 0.67
PERIOD ? 1.234*** 5.99
VAR + 0.288 0.58
MV + 0.412*** 3.21
Adjusted R2 3.30%

Constant 0.385*** 5.42
PERIOD ? 0.0461*** 4.14
MV 2 20.0271*** 23.90
BETA + 20.001*** 24.00
Adjusted R2 3.21%

otherwise).
permanent decreases in the relative bid-ask spread subsequent to the internal control disclo-
sure dates, the appropriate transfer function will have the characteristics of an abrupt, con-
stant change as suggested by Greenstein and Sami (1994) and Zhou (2007). Our analyses
show that the appropriate transfer function is an abrupt constant change which indicates lack
of the existence of any time trend. Hence, within the context of our research study, the only
plausible explanation for any significant interruption in the time series would be due to the
effect of the implementation of SOX internal control disclosure requirements.
Table 6. Cross-Sectional Regression Results: The Impact of the Implementation of Section 302 on
Bid-Ask Spread, Trading Volume, and Price Volatility for Non-Accelerated Filers (Free Float
Capitalization Less Than US$75 Million, n = 186).

Constant 8.235*** 16.08
PERIOD ? 20.473*** 22.89
VAR + 0.974** 2.52
TURNOVER 2 20.0280* 21.81
MV 2 20.538*** 213.09
Adjusted R2 65.40%

Constant 4.337 1.59
PERIOD ? 21.083 21.24
VAR + 2.317 1.12
MV + 0.894*** 4.29
Adjusted R2 10.67%

Constant 0.456*** 5.05
PERIOD ? 0.062** 1.98
MV 2 20.030*** 24.21
BETA + 0.013*** 6.27
Adjusted R2 29.06%

otherwise).
We first identify a time-series model for each firm based on 50 weeks of data from the
pre-adoption period based on the following model.
Sit = TSMi , ð4Þ
where Sit = weekly relative bid-ask spread as proxy for information asymmetry for firm i at
time t; TSMi = vector of coefficients of time-series model for firm i.
Gupta et al. 219
Table 7. Sample Selection Procedure for Time-Series Analyses.
Sample selection procedure

Firms included in Audit Analytics database with first-time implementation 2,289
information on Sections 302 and 404 of SOX from Table 1
Less: Firms whose equity price information were not available from the CRSP database 430
Less: Firms with unclean internal control report under both Sections 302 and 404 230
Less: Firms whose data cannot converge 7
Total firms available for analysis 1,622
Note. SOX = Sarbanes–Oxley Act; CRSP = Center for Research in Security Prices.
Then, intervention components and the explanatory variables are added to the time-
series model, which is then estimated with the whole data series from January 2002 to
December 2006.10
Sit = TSMi + a1 I1 + a2 I2 + b1 VOLit + b2 VARit + eit , ð5Þ
where Sit = weekly relative bid-ask spread as a proxy for information asymmetry for firm i
at time t as defined before; TSMi = time-series model for firm i; I1 = the first intervention
component, coded as 1 if the observation is from the post-adoption period of Section 302
of SOX and 0 otherwise; I2 = the second intervention component, coded as 1 if the obser-
vation is from the post-adoption period of Section 404 of SOX and 0 otherwise; VOLit =
weekly share turnover for firm i at time t. Share turnover is defined as the dollar amount of
trading volume divided by the market value of the firm; VARit = weekly standard deviation
of daily returns for firm i at time t.
The time-series intervention model is different from the traditional cross-sectional time-
series analysis in that only one company’s time-series data set is analyzed each time. We
use weekly observations of market variables to allow for sufficient sample size to perform
the time-series interventions analysis because using yearly data does not provide enough
sample size and the use of daily data introduces the potential noise reflecting the short-
term frictions in the market. One observation in each week, which is Wednesday, is used in
our article. In this sense, the control variables used in the intervention model—Model
(5)—do not include the firm feature variables such as firm size (MV), because the firm fea-
ture variables are less dynamic than the market liquidity variables.
Similar to cross-sectional analyses, the sample selection for time-series intervention
analyses started with all firms included in the Audit Analytics database. These firms are
then subjected to the following screening criteria: (a) Internal control information is avail-
able under both Sections 302 and 404, (b) firm’s equity price data are available on CRSP,
and (c) firms have clean Section 302 and 404 reports. Excluding firms whose data cannot
converge, our final sample includes 1,622 firms for the analysis of both Sections 302 and
404. We summarize the sample selection procedure in Table 7.
Panel A of Table 8 provides the results of the basic time-series analysis on the bid-ask
spread before the disclosure of internal control effectiveness made by firms’ management
under Section 302. We identify the time-series models for the 1,622 firms based on the 50
weeks of data in the pre-adoption period for Section 302 of SOX. The plotting of autocor-
relation and partial autocorrelation, and the Box–Cox tests indicate that the relative spread
data follow a white noise model for approximately 34% of the sample firms before the
implementation of Section 302. Also, there are about 32% of sample firms with relative
Table 8. Time-Series Intervention Analysis of Bid-Ask Spread Around the Implementation of

Sections 302 and 404 of SOX.
Panel A: Time-Series Models Identified for Sample Group.
ASit = TSMi + eit
Model No. (%) of firms identified %
White noise 545 33.60
MA(1) 10 0.62
MA(2) 12 0.74
MA(3) 4 0.25
MA(4) 1 0.06
AR(1) 523 32.24
ARMA(1,1) 245 15.10
ARMA(1,2) 10 0.62
ARMA(1,3) 7 0.43
AR(2) 175 10.79
ARMA(2,1) 8 0.49
ARMA(2,2) 9 0.55
AR(3) 64 3.95
ARMA(3,1) 4 0.25
ARMA(3,2) 0 0.00
AR(4) 2 0.12
AR(5) 3 0.18
Total 1,622 100.0
Panel B: Summary of Intervention Analysis.
Sit = TSMi + a1 I1 + a2 I2 + b1 VOLit + b2 VARit + eit
No. (%) of firms with significantly Binomial p value Mean standardized
Variable negative coefficients (one-tailed) shift vit (SD)
I1 1,132 (69.79) \.0001 22.531*** (2.225)
I2 486 (29.96) \.0001 20.521*** (2.190)
Note. In this table, the time-series model is estimated for both events. We use data from the 50 weeks before the
implementation of Section 302 to estimate the time-series model. Then, the two intervention items are added to
the whole time series to analyze the intervention items. MA = Moving Average; AR = Auto Regressive. Definitions
of variables: SOX = Sarbanes–Oxley Act; Sit = weekly relative bid-ask spread as proxy for information asymmetry
for firm i at time t as defined in Table 2; TSMi = time-series model for firm i; eit = white noise for firm i at time t; I1
= the first intervention component, coded 1 if the observation is from the post-adoption period of Section 302 of
SOX and 0 otherwise; I2 = the second intervention component, coded 1 if the observation is from the post-
adoption period of Section 404 of SOX and 0 otherwise; VOLit = weekly share turnover for firm i at time t with
share turnover defined as the dollar amount of trading volume divided by the market value of a firm; VARit =
weekly standard deviation of daily returns for firm i at time t; vit = the standardized coefficient of intervention
component for firm i at time t, calculated as the estimated coefficient of intervention component divided by the
standard error of the estimates. For brevity purposes, the results for the control variables (VOL and VAR) are not
presented.
***, **, and * implies significance at .01, .05, and .10 (one-tailed), respectively.
spread data following first-order autoregressive scheme (see Model AR(1) in Panel A),
about 15% following autoregressive moving average model (see Model ARMA(1,1)
in Panel A), about 11% following second-order autoregressive scheme (see Model
AR(2) in Panel A), and about 4% following third-order autoregressive scheme (see Model
AR(3) in Panel A).
Gupta et al. 221
Next, we add two intervention variables as well as explanatory variables to the basic
time-series model, and estimate the extended time-series model for the whole time-series
data. Panel B of Table 8 summarizes these results. The results for the intervention factor
(I1) indicate that about 70% of the firms in our sample experienced a significant downward
shift in their bid-ask spreads subsequent to the implementation of Section 302.11 Following
Greenstein and Sami (1994) and Zhou (2007), we conduct a binomial test and find that the
number of firms in the sample that experienced downward shifts in bid-ask spread is signif-
icantly larger than by chance (50%). The mean (22.531) and the standard deviation
(2.225) for the standardized coefficient for the intervention factor (I1) are also presented in
Table 8. Consistent with our expectation and based on t test, the mean of the intervention
factor (I1) standardized coefficients is significantly less than 0 (t value = 245.80 and
p value less than .01), which indicates that, on average, the shifts in the time-series data of
the relative spread for the sample firms are significantly downward after the implementa-
tion of Section 302. These results support H1.
Much like Section 302, Panel B of Table 8 also summarizes the results of the intervention
analysis for Section 404 (I2). The results for the intervention factor (I2) indicate that only
about 30% of the firms in our sample experienced a significant downward shift in their bid-
ask spreads subsequent to the implementation of Section 404.12 The binomial test indicates
that the number of firms that experienced downward shifts in bid-ask spreads is significantly
smaller than by chance (50%). The mean (20.521) and the standard deviation (2.190) for the
standardized coefficient for the intervention factor (I2) are also presented in Panel B of Table
8. Based on the t test, the mean of the intervention factor’s standardized coefficients (I2) is
significantly less than 0 (t value = 29.58 and p value less than .01), which was driven by
only less than one-third of the sample firms that experienced a significant reduction in their
bid-ask spreads. The mean reduction for the whole sample is much less compared with the
mean reduction that occurred after the implementation of Section 302 (22.531 vs. –0.521).
To simplify the content of Table 8, no descriptive statistics are reported for the propor-
tion of the firms with significant coefficients for the two control variables: VOL and VAR.
About 22% and 20% of the firms show significant coefficients on VOL in the analysis of
Sections 302 and 404, respectively. About 35% and 23% of the firms show significant
coefficients on VAR in the analysis of Sections 302 and 404, respectively. Consistent with
prior studies (e.g., Copeland & Galai, 1983), the coefficients for VOL are overwhelmingly
negative and those for VAR are positive.
We conduct additional analyses on the effect of firm characteristics on the mean standar-
dized shifts in bid-ask spreads. The results (not shown) indicate that firms with a higher return
on assets (ROA) and higher leverage experienced more reductions in bid-ask spreads under
SOX 302 and SOX 404. Reduction in bid-ask spreads under SOX 302 and SOX 404 is com-
mensurate with firm size (MV). In addition, companies with Big-4 Certified Public Accounting
(CPA) Firms as their auditors experienced higher reductions under SOX 302, while there is no
significant difference in the reductions between companies employing Big-4 CPA Firms and
non-Big-4 CPA Firms under SOX 404. Firms listed on New York Stock Exchange (NYSE)
experienced more reductions in their bid-ask spreads under SOX 404, while there is no differ-
ence in reductions between firms listed on NYSE and firms listed on other stock exchanges
under Section 302. These findings are consistent with the prior literature that documents the
partial adjustment of prices to information in small and less frequently traded securities. When
prices of securities only adjust partially to market information, uninformed traders expect to
lose more in trading with informed traders because informed traders have more opportunities
to gain from their information advantages in such a situation. Our results also indicate that
profitability and leverage variables could be viewed as aggravating variables in the downward
adjustment of bid-ask spreads in response to the additional information disclosure of internal
control conditions regarding the financial reporting process.
To examine whether the results obtained are caused by the normal period-to-period var-
iation and/or some non-accounting-policy changes occurring with respect to the market
micro-structure, we introduce an artificial (dummy) event as a sensitivity test. We use the
third Tuesday of January 2002 as the artificial event date. The artificial event is selected in
such a way so that it is not related to any actual event dates. In other words, we conducted
a careful search of the websites of the SEC and the major stock markets for their major
events to make sure that the date of the dummy event is not an actual one. No significant
results are, however, found for the intervention variable representing this artificial
(dummy) event for most of the sample firms. Binomial tests suggest that the percentage of
sample firms that experienced a significant downward shift in their bid-ask spreads around
the dummy event is smaller than by chance (50%) rather than larger than by chance. This,
therefore, confirms the conclusion arrived at earlier that the permanent decrease in bid-ask
spread of the majority of our sample firms subsequent to the disclosure under Section 302
is due to the implementation of SOX Section 302 but not a random event.
Summary and Conclusion

In this article, we attempt to investigate whether the newly mandated ICFR disclosures under
Sections 302 and 404 exert any influence on information asymmetry in U.S. capital markets.
We do this by documenting the association between mandated management and auditor
reporting on internal control and information asymmetry in capital markets for ‘‘clean opin-
ion’’ companies. We hypothesize that management’s and auditor’s report on internal control
would provide outside investors with additional information, previously not available to
them, which would lead to greater assurance and predictability about a firm’s future pros-
pects. This, in turn, would reduce information asymmetry in the capital markets about a firm
as reflected in its reduced bid-ask spreads and price volatility, and increased trading volume.
We find that, subsequent to the management disclosure on internal control in compli-
ance with Section 302, bid-ask spread decreased, trading volume increased, and price vola-
tility decreased for our sample companies. We also find that, subsequent to the auditor’s
reports on internal control in compliance with Section 404 bid-ask spread, trading volume
and price volatility had no significant changes for the companies in our sample, which is
contrary to our expectations but consistent with the results of previous studies using differ-
ent methodologies (Beneish et al., 2008; Ogneva et al., 2007). The cross-sectional regres-
sion results suggest that the increased disclosure due to the implementation of SOX Section
302 has indeed reduced the information asymmetry in the capital markets in general.
However, implementation of Section 404 subsequent to Section 302 does not add to the
further reduction of information asymmetry in the capital markets in significant ways.
Many additional analyses, including time-series analyses, confirmed these results.
The findings as they relate to Section 404 disclosures are somewhat surprising and con-
trary to the popular belief that auditor’s independent certification of a company’s ICFR add
value. A recent study by Rice, Weber, and Wu (2013) also questions the value-added of the
SOX 404 reports by finding that penalties that serve as the enforcement mechanisms for
SOX 404 do not differ across the two groups of restatement firms- the group that had previ-
ously disclosed material weakness and the group that did not. However, one possible expla-
nation for our findings of less than significant Section 404 results is that, during the period
Gupta et al. 223
covered by our sample, capital markets overreacted to Section 302 disclosures (a) due to the
heightened sensitivity to such disclosures during the early phase of internal control effective-
ness reporting and (b) due to the knowledge that Section 404 audits and reports were forth-
coming. Thus, the forthcoming Section 404 requirement could also be a contributing factor
for the Section 302 results. Furthermore, it is possible that the ‘‘moral hazard’’ that would
normally accompany management’s reporting under Section 302 (and for which 404 imposed
the auditor discipline) was considerably mitigated by the fear of criminal penalties to be
imposed on company’s senior management under Section 906 in case their Section 302 certi-
fications later turned out to be false and misleading.
Consequently, our findings do raise a question: To what extent does auditor certification
of a registrant’s internal control effectiveness under Section 404 contribute incrementally to
a reduction in information asymmetry in capital markets? In addition, does the additional
assurance provided by the Section 404 disclosures and certification outweigh the cost of
obtaining this assurance? In other words, the empirical results presented in this article con-
tribute to the ongoing public policy debate on whether ICFR disclosures under Section 404
pass the ‘‘equity’’ test espoused by Lev (1988) to gauge whether a certain piece of account-
ing regulation is in public interest. Hence, we raise the following question: Can the society,
at large, realize most of the benefits from mandating public disclosure of internal control
effectiveness at a much lesser cost? In other words, is the Section 302 disclosure require-
ment alone when backed by the Section 906 personal criminal penalties sufficient to
achieve the intended ‘‘equity’’ in capital markets rather than imposing additional costs
through mandating Section 404 requirements?
To present a balanced perspective, a supporter of auditor certifications under Section
404 can offer the following counter-argument to explain our findings. The only reason
management certification under 302 reduces information asymmetry in the capital markets
is that the capital market participants know they will be receiving confirmations of the
managements’ certification under Section 302 via the Section 404 reports in the near
future. Thus, the ‘‘impending’’ auditor examination and certification under 404 works as a
strong control and forces company management to take 302 certifications seriously, thereby
enhancing the value and information content of these certifications. It is plausible that in
the absence of the forthcoming 404 auditor certification, we may not have seen the results
that we find on the dominance of Section 302.
As our research is the first to evaluate the impact of Section 302 and 404 disclosures on
information asymmetry in capital markets by quantifying some of the intended benefits,
additional future research is needed to draw any conclusions on whether ‘‘mere possibility’’
of criminal penalties alone is sufficient to negate the need for Section 404 auditor certifica-
tion. Certainly, as Susan Markel, former Chief Accountant of the SEC’s Enforcement
Division, would argue, ‘‘regulation does not always work, but jail does.’’
We acknowledge that our study has limitations. As in most studies on the effectiveness
of regulations and policy making, we cannot eliminate the contemporary effects of the
policy or regulation itself from the effect of enforcement, such as the establishment of the
PCAOB, and the increased penalties for financial fraud, which is Section 906 mentioned in
our article. We could not isolate other relevant regulatory rules by the SEC to implement
the SOX. As these are related to essential enforcement of SOX 302 and 404, it is not prac-
tical to isolate the effects of policies and standards themselves from the effects of the
enforcement power of regulators. However, to a certain degree, the sensitivity tests and the
use of other groups could help us relatively address these issues.
Acknowledgment
This paper has benefited from comments received from Bharat Sarath, the editor, and two anonymous
reviewers. We thank the conference reviewers, discussants, and participants at American Accounting
Association (AAA) 2009 annual meeting, European Accounting Association (EAA) 2011 annual meet-
ing, AAA 2011 and AAA 2013 annual meetings for their insightful comments on earlier versions of rel-
evant papers under different titles. Haiyan Zhou gratefully acknowledges the research assistance of Hua
Cheng and Bobby Killings and the support of the Ph.D. program at College of Business Administration
at the University of Texas Pan American (now University of Texas Rio Grande Valley).
Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/
or publication of this article.
Funding
The author(s) received no financial support for the research, authorship, and/or publication of this
article.
Notes
1. Lev (1988) argues that equity considerations in the capital markets are the raison d’etre for
accounting and disclosure regulation. He uses a broad definition of equity—ex-ante equality of
opportunity as opposed to ex-post equality of actual outcomes because the former is the one that
is most proclaimed in public policy debates in the United States. Within the context of capital
markets, equality of opportunity is present when all investors are endowed with the same infor-
mation about a company and its securities.
2. Although the underlying provisions of the Sarbanes–Oxley Act (SOX) of 2002 remain
unchanged, the revised interpretations by the U.S. Securities and Exchange Commission and the
newly issued Auditing Standard No. 5 by the Public Company Accounting Oversight Board
(PCAOB, 2007) now only require auditors to express an independent opinion on the effective-
ness of a company’s internal control over financial reporting (ICFR). This change was effective
for companies with fiscal years ending on or after November 15, 2007. Prior to this, pursuant to
Section 404(b) external auditors were also required to express opinions on the effectiveness of
the management’s assessment process leading to management’s report under Section 404(a).
3. For example, in the recent literature, Chen, Krishnan, Sami, and Zhou (2013) examine whether
earnings accompanied with the first-time Section 404 ICFR reports were associated with a higher
degree of informativeness when compared with earnings of the prior year when only financial
statement audit reports were available. Similarly, to document positive effects of ICFR disclo-
sures, Singer and You (2011) examine whether ICFR disclosures help reduce earnings manage-
ment and increase earnings relevance.
4. We conduct additional analyses on the effect of firm characteristics on the mean standardized
shifts in bid-ask spreads and report the results at the end of our discussions of time-series inter-
vention analyses.
5. Section 989G(a) of the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010
added Section 404(c) to the SOX of 2002 which states that auditor attestation requirement of
Section 404(b) will permanently apply only to the accelerated filers (i.e., companies with free
float of more than US$75 million).
6. We require our sample firms to have implementation information on both SOX 302 and SOX
404 to have a consistent sample for our analyses. However, we also drop the criteria and perform
additional analyses for all firms with implementation information available from Audit Analytics
database. The results are qualitatively similar to what we reported in the primary tests.
Gupta et al. 225
7. To limit the effect of outliers on the cross-sectional regression results, we winsorize the data at
1% and 99%.
8. We are unable to analyze the non-accelerated filers with regard to the Section 404(b) disclosures
because such disclosures were never made by these companies due to several extensions granted
to them by the Securities and Exchange Commission (SEC) and then finally exemption granted
to them by the Dodd–Frank Act.
9. As the primary focus of our article is to compare the information environment between pre- and
post-SOX periods for firms without material control weakness in their internal controls (i.e.,
firms with clean 302 reports and clean 404 reports), we exclude the ‘‘non-compliant’’ firms.
Inclusion of this group introduces confusion in isolating the true effect of the ICFR disclosures
on market micro-structure. Nevertheless, we separately examine this group of firms (i.e., firms
with clean 302 reports but adverse 404 reports) to assess whether the market could somehow dif-
ferentiate the self-reported clean conditions of such a group under SOX 302 and whether incre-
mental information content of material weakness disclosures in SOX 404 report has any impact
on firm information asymmetry. Consistent with the primary results of the 302 and 404 clean
report firms, the coefficient on PERIOD in the bid-ask spread model is negative and significant
for the material weakness group under SOX 302 but not under SOX 404. These results indicate
that ICFR disclosures under Section 302 result in reduction of bid-ask spread even for such
firms, and this disclosure undoubtedly helps reduce the information symmetry for all accelerated
filers in the capital markets. However, in the trading volume model and price volatility model,
such coefficients are insignificant for the material weakness group. This could result from the
offsetting effect of the nature of the internal control weaknesses disclosed by these firms, that is,
the positive effect of increased internal control disclosure on the liquidity could be offset by the
negative effect of bad news contained in the material weakness disclosure made by these firms.
It seems that market could somehow differentiate the self-reported clean conditions of such a
group under SOX 302. Again, we do not find any significant changes in bid-ask spread, trading
volume, or price volatility subsequent to the implementation of Section 404 for such a group.
10. Wei and Reilly (1990) indicate that time-series analyses could identify multiple abrupt, constant
changes in the same model. Nevertheless, to check the sensitivity of our results with regard to
such a procedure, we conduct separate tests for Sections 302 and 404 by using 50 weeks before
and 50 weeks after the internal control disclosures for each section (identifying the time-series
models using the bid-ask spreads for 50 weeks before each section’s disclosures and conducting
separate time-series analyses for each section) in the intervention analyses which yield qualita-
tively similar results to those reported.
11. Following Wei and Reilly (1990), we remove outliers and re-estimate the intervention analyses.
The results of this analysis are qualitatively similar to those reported.
12. Following Wei and Reilly (1990), we remove outliers and redo the intervention analyses. The
results of this analysis are qualitatively similar to those reported.
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Do Companies With Effective Internal Control Over FR Benefit From SOX Section 302 and 404

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Do Companies With Effective Internal Control Over FR Benefit From SOX Section 302 and 404

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Parveen P. Gupta1, Heibatollah Sami1, and Haiyan Zhou2

ICFR and SOX 302 and 404

Disclosure Regulation and Information Asymmetry

a major characteristics of equality of opportunity is that it is an ex ante concept of equity, as

SPREADi = a0 + a1 PERIOD + a2 MVi + a3 TURNOVERi + a4 VARi + ei , ð1Þ

Table 1. Sample Selection Procedure for Cross-Sectional Analyses.

Number of firm-year Number of firm-year

TURNOVERi = a0 + a1 PERIOD + a2 MVi + a3 VARi + ei , ð2Þ

VARi = a0 + a1 PERIOD + a2 MVi + a3 BETAi + ei , ð3Þ

Table 3. Pearson Correlation Coefficients for Variables.

Note. See definitions of variables in Table 2. SOX = Sarbanes–Oxley Act.

Panel A: Bid-Ask Spread Model.

Panel B: Trading Volume Model.

Panel C: Price Volatility Model.

Note. See definitions in Table 2. SOX = Sarbanes–Oxley Act.

Panel A: Bid-Ask Spread Model.

Panel B: Trading Volume Model.

Panel C: Price Volatility Model.

Note. See definitions in Table 2. SOX = Sarbanes–Oxley Act.

Panel A: Bid-Ask Spread Model.

Panel B: Trading Volume Model.

Panel C: Price Volatility Model.

Note. See definitions in Table 2. SOX = Sarbanes–Oxley Act.

Sit = TSMi , ð4Þ

Table 7. Sample Selection Procedure for Time-Series Analyses.

Sample selection procedure

Sit = TSMi + a1 I1 + a2 I2 + b1 VOLit + b2 VARit + eit , ð5Þ

Table 8. Time-Series Intervention Analysis of Bid-Ask Spread Around the Implementation of

Summary and Conclusion

Declaration of Conflicting Interests

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