The Sarbanes-Oxley Act of 2002 and Security Market Behavior: Early Evidence

PANKAJ K. JAIN, The University of Memphis

Morgan Keegan Professor and Assistant Professor of Finance
Fogelman College of Business and Economics
300 Fogelman College Admin. Building
Memphis, TN 38152-3120
Phone: (901) 678-3810
Fax: (901) 678-2685
E-Mail: pjain@memphis.edu

ZABIHOLLAH REZAEE,
*
The University of Memphis
Thompson-Hill Chair of Excellence & Professor of Accountancy
Fogelman College of Business and Economics
300 Fogelman College Admin. Building
Memphis, TN 38152-3120
Phone: (901) 678-4652
Fax: (901) 678-0717
E-Mail: zrezaee@memphis.edu



Posted March 2004

This Revision: May 16, 2005

*
Corresponding Author.

We received useful comments from workshop participants, in December 2002, at the University of
Memphis on the initial draft of this paper, entitled An Examination of the Value Relevance of the
Sarbanes-Oxley Act of 2002. We are grateful for suggestions from Rashad Abdel-Khalik, Terry Shevlin,
Hassan Tehranian, Lynn Turner, and Mohan Venkatachalam on the initial draft. We also thank participants
at the 2003 Accounting Research Consortium at Mississippi State University on April 25, 2003,
particularly Larry Abbott, Noel Addy, Jeff Boone, Pinaki Bose, Bill Cready, Rick Elam, Joshua Ronen and
Ram Thirumalai for their comments and suggestions on the early draft of the paper, under the title Capital
Market Reactions to the Sarbanes-Oxley Act of 2002. Professor Rezaee acknowledges research support
from the Thompson-Hill Chair of Excellence.

The Sarbanes-Oxley Act of 2002 and Security Market Behavior: Early Evidence
Abstract
The Sarbanes-Oxley Act of 2002 (the Act) was enacted in response to numerous corporate and accounting scandals,
and was aimed at reinforcing corporate accountability and professional responsibility in order to restore investor
confidence in corporate America. This study examines the market reaction to the Act and finds a positive (negative)
abnormal return at the time of several legislative events that increased (decreased) the likelihood of the passage of
the Act. We find that the Act was wealth-increasing on average, and that the market reaction is more positive for
more compliant firms with effective corporate governance, reliable financial reporting, and credible audit functions
prior to its enactment. Investors interpreted the Act as good news and led toward the restoration of investor
confidence in public financial information. Overall, our results suggest that the induced benefits of the Act
significantly outweigh its imposed compliance costs.


Keywords: Financial scandals; the Sarbanes-Oxley Act of 2002; market reactions; corporate
governance

Data Availability: Data are commercially available from the sources identified in the study.

JEL Classification: G14; G28; M41


1
The Sarbanes-Oxley Act of 2002 and Security Market Behavior: Early Evidence

1. Introduction
The wave of financial scandals in the late 1990s and the early 2000s has reinvigorated the debate
on regulating corporate governance and the accounting profession. Investors concerns about these scandals
and the resulting loss of confidence are commonly cited as a primary reason for the stock market slump in
2002 (Browning and Weil 2002). To restore investor confidence and reinforce corporate accountability and
professional responsibility, Congress passed the Sarbanes-Oxley Act (hereafter, the Act) in July of 2002.
The Act was aimed at improving corporate governance, enhancing the quality of financial reports,
promoting audit effectiveness, creating the Public Company Accounting Oversight Board (PCAOB) to
regulate the auditing profession, and increasing criminal and civil liability for violations of Securities laws.
The Act addresses the conduct and professional accountability of those who produce, certify, audit,
analyze, and use public financial information. The Act is considered as broad an attempt to correct free-
market externalities as any legislation passed by the federal government in recent memoryit deals with
what people do, not where securities go (Wiesen 2003, 429). Anecdotal evidence (CRA 2005; Turner
2005) indicates that while the Act has induced significant benefits to investors, it has also imposed
substantial compliance costs of over 0.10 percent of the total revenues of public companies. However, there
is no empirical evidence regarding the potential costs and benefits of the Act. This study contributes
evidence to this debate by investigating shareholder wealth effects of the Act and possible determinants of
such effects. These effects are a function of both the expected benefits and costs imposed on public
companies by the Act (Healy and Palepu 2001; Bushee and Leuz 2005).
The Act assists public companies to identify and monitor conflicts of interest, and thus provides
incentives and opportunities for those involved with public financial information to become more vigilant
and transparent in reporting financial information. Nevertheless, the Act has received mixed responses from
the financial community and the accounting profession. It has been viewed by many as containing the most
sweeping measures taken by legislators addressing corporate governance, financial reports, and audit
functions,
1
Opponents consider the Act to be a patchwork and codified response by Congress to widely

2
publicized financial scandals, which imposes substantial costs on public companies with no direct impact
on improving corporate governance and financial disclosures, at least beyond those of market-based
mechanisms.
2

The purpose of this study is twofold. First, it examines the effect of the Act on shareholder wealth
by investigating the capital market reactions to several Congressional events leading up to the passage of
the Act using market-level data. Second, it investigates whether firm-specific attributes (corporate
governance, financial reporting, and audit functions) were associated with the detected market reactions.
Our time-series analysis provides a relatively powerful test of possible shareholder wealth effects of the Act
primarily because key events late in the legislative process (see Table 1) were unexpected.
3
We use newly
developed Transparency and Disclosure (T&D) scores by Standard & Poors (S&P) and other firm
attributes (accruals, size, leverage, growth, audit fees) in our cross-sectional analysis to link the observed
market reaction to the expected costs and benefits of the Act. We detect a positive (negative) abnormal
return at the time of several legislative events increasing (decreasing) the likelihood of the passage of the
Act. Our portfolio-level event analysis reveals that the capital markets reacted positively to Congressional
events leading up to the passage of the Act. The results support general perceptions that the Act is
achieving its intended purpose of restoring investor confidence.
4
Indeed, the chairman of the Securities and
Exchange Commission (SEC), William H. Donaldson, stated that: the Act has effected dramatic change
across corporate America and beyond, and is helping to reestablish investor confidence in the integrity of
corporate disclosures and financial reporting (Donaldson 2005). We find that the Act was wealth-
increasing, on average, and that the market reaction is more positive for firms that were closer to
compliance to the Act (measured by their corporate governance, financial reporting, and audit functions)
prior to its enactment. Our results are robust after controlling for other firm attributes such as size,
performance, audit fees, and leverage. These results are consistent with the findings of Bushee and Leuz
(2005), which suggest that SEC regulations on mandatory disclosures provide positive externalities
(positive stock returns, improvements in liquidity) for firms that were already compliant with such
regulations.

3
The results of this study have implications for public companies and their executives, investors,
researchers, and policymakers. The results suggest that investors value regulations, such as the Act, that
create positive changes in corporate governance, the financial reporting process, and audit functions.
Results are consistent with the findings of La Porta, Lopez-de-Silanes, Shleifer, and Vishny (1997, 1998,
2002) and Greenstone, Oyer and Vissing-Jorgenson (2004) that mandatory disclosure requirements induced
by laws (the Act) provide higher levels of investor protection and are associated with higher valuations of
equities. Policymakers (Congress) and regulators (SEC) should be interested in the results and assessment
of enacted legislations and regulations aimed at restoring public confidence in public financial information.
These results shed some light on the intended purpose of the Act toward the restoration of investor
confidence in public financial information. Thus, this study is important given recent initiatives by
lawmakers, regulators, national stock exchanges, the financial community, and the accounting profession to
provide investors with greater protection from financial scandals. This paper also contributes to academic
research on the economic consequences of mandatory financial disclosures, which have been claimed to be
virtually non-existent (Healy and Palepu 2001: 45).
The remainder of the paper proceeds as follows. The next section reviews the related literature. A
discussion of possible shareholder wealth effects of the Act, the events leading to the passage of the Act,
and the hypothesis development are presented in Section III. Section IV discusses our research design.
Results are presented in Section V, and a final section concludes the paper.

2. Prior Research
Several related studies examine securities price reactions to federal regulations including the
Securities Act of 1933, the Securities Act of 1934, and the Private Securities Litigation Reform Act
(PSLRA) of 1995.
5
Benston (1969) finds no value-relevance of compulsory disclosure requirements of the
Securities Act of 1934 on the grounds that (1) there was no evidence of financial statement fraud prior to
the Securities Act; (2) adequate investor protection existed in competitive markets prior to the Act; and (3)
sufficient voluntary disclosures existed prior to Securities Acts. The Sarbanes-Oxley Act is different from
the Securities Acts of 1933 and 1934 in several respects: (1) there was considerable evidence of financial

4
statement fraud by high profile companies (Enron, WorldCom, Global Crossing, Qwest) that encouraged
Congress to pass the Act; (2) there was evidence of the lack of transparency of financial reports prior to the
Act (e.g., excessive off-balance-sheet transactions, special purpose entities); (3) the PSLRA of 1995 limited
the extent of investor protection in competitive markets; and (4) provisions of the Act and SEC rules are
intended to improve not only financial disclosures but also corporate governance and audit functions.
Wiesen (2003, 429), in comparing the Act with its predecessor, the Securities Act of 1934, states
Sarbanes-Oxley is more than just a fine-tuning of that legislationit puts flesh on a 70-year-old skeleton.
Spiess and Tkac (1997) and Johnson, Krasznik, and Nelson (2000) investigate stock price reaction
to several events leading to the enactment of the PSLRA. These studies conclude that investors considered
the PSLRA beneficial by documenting significantly negative abnormal returns for firms in high-litigation-
risk industries on December 18, 1995 (amid presidential veto rumors), and significantly positive abnormal
returns on December 20 1995 (after the House override of veto). Conversely, Ali and Kallapur (2001) find
evidence that suggests that investors considered the PSLRA harmful. Bushee and Leuz (2005) examine
economic consequences of a regulatory change requiring firms quoted on the Over-the-Counter Bulletin
Board (OTCBB) to comply with the disclosure requirements under the Securities Act of 1934. Bushee and
Leuzs (2005) study is one of the very few studies providing evidence on the perceived costs and benefits
of disclosure regulation by documenting that (1) the imposition of SEC disclosures results in significant
costs to noncompliant and newly compliant firms; and (2) previously compliant firms exhibit positive stock
returns, which suggest positive externalities from disclosure regulation. Greenstone et al. (2004) find that
increased disclosure results in significant cumulative abnormal returns.
Two contemporaneous studies examine the effects of the reported financial scandals and the
Congressional responses (the Act) on investor confidence.
6
Cohen, Dey, and Lys (2004) document that
earnings management activities of public companies increased substantially during the financial scandal
period and this trend reversed following the passage of the Act, which indicates that increased earnings
management led to the erosion of investor confidence, and that the Act restored that confidence. Jain, Kim,
and Rezaee (2004) find: (1) wider spreads, lower depths, and higher adverse selection component of
spreads during the financial scandal period, indicating a deterioration of market liquidity measures; and (2)

5
evidence indicating improvements in liquidity measures after the passage of the Act both in the short and
long-term. Two recent studies, one by Li, Pincus, and Rego (2004) and another by Engel, Hayes, and Wang
(2004), were conducted after our initial study: Li et al. (2004) finds the Act has a beneficial effect as it
reflected in security prices while imposing greater costs on firms that were less compliant with its
provisions prior to the enactment; Engel et al. (2004) examine firms going-private decisions in light of
potential benefits and costs of compliance with provisions of the Act. Engel et al. 2004 find that the
detected abnormal return surrounding events that increased the likelihood of the passage of the Act were
positively associated with the firms size and share turnover, indicating that compliance costs were more
burdensome for smaller and less liquid firms. Although prior related research provides insights into the
effects of regulations on stock markets, earnings management activities, and market liquidity, it does not
address the determinants of such effects including firm-level issues of corporate governance, financial
reporting, and audit functions.
3. The Sarbanes-Oxley Act of 2002
The Acts main purpose is to foster integrity in financial markets and restore investor confidence
in corporate governance, financial reports, and related audit functions. The Act should be regarded as a
process that can: (1) identify and monitor conflicts of interest that provide opportunities and temptation to
mislead investors (independence of directors and auditors); and (2) establish the incentives and penalties
that encourage those involved with published financial reports to fulfill their professional responsibilities
(executive certifications, penalties for violations of Securities laws). Proper implementation of the
provisions of the Act and SEC related rules is expected to: (1) improve corporate governance by assisting
in aligning the interests of management with those of shareholders; (2) enhance the quality, reliability, and
transparency of financial information; and (3) improve audit objectivity and effectiveness in lending
credibility to published financial statements (Rezaee 2004). These provisions of the Act are summarized in
the Appendix A, and are empirically examined in our cross-sectional analysis of the potential costs and
benefits of the Act.
7


6
The Process and Rationale Underlying the Legislation
The wave of financial scandals in the early 2000s encouraged lawmakers and regulators to argue
that Securities markets cannot be trusted to work on their own without strong regulatory support and that
new regulation was needed to restore investor confidence (Ribstein 2002). In the absence of adequate
market-based correction mechanisms, facing a volatile stock market and a frustrated investing public,
legislators responded to this crisis by passing the Act in an attempt to reinforce corporate accountability
and restore investor confidence. In July 2002, the Act moved with high speed through the legislature and
gained momentum with the revelation of reported financial scandals. A major obstacle in determining the
impact of regulations on shareholder wealth is the difficulty of identifying: (1) all likely major events in the
period leading up to the passage of the Act; (2) the precise dates on which information became available to
market participants; and (3) when the market first anticipated the possible effects of such events (Ali and
Kallapur 2001).
Consistent with prior research (Espahbodi, Espahbodi, Rezaee, and Tehranian 2002; Ali and
Kallapur 2001), we use multiple sources in identifying the significant legislative events. The initial step
taken to identify key events was to search the SEC and Congressional websites and to look for press
releases regarding the events pertaining to the Act as listed in Table 1. We next searched the Wall Street
Journal index (WSJI), the Wall Street Journal (WSJ), and the New York Times (NYT) to confirm and/or
identify the event dates.
8
Each of the 12 identified events are potentially significant to investors as they
inform investors of the likelihood of the passage of the Act and its possible impact on corporate
governance, the financial reporting process, and audit functions. The capital market might have anticipated
the possible effects of the 12 identified significant legislative events before they occurred. Following the
strategy used by Schipper and Thompson (1983) and Ali and Kallapur (2001), we classify these 12 events
into three categories based on their likelihood to alter expectations about the passage of the Act: (1)
ambiguous events that had either no effect or a neutral effect on the Acts assessed probability of
enactment, (2) unfavorable events that decreased the Acts assessed probability of enactment, and (3)
favorable events that increased the Acts assessed probability of enactment, as discussed in the following
sections. Figure 1 illustrates the timeline of legislative events pertaining to the ambiguous, unfavorable, and

7
favorable periods during the legislative process along with their anecdotal evidence, provisions, and our
predictions of possible security price reactions.
Ambiguous Events
Legislators and regulators initially attributed reported financial scandals of the early part of 2002
(Enron, Global Crossing, Adelphia) as a few rotten apples requiring no regulatory responses
(Cunningham 2003). During this period, investors were frustrated with the wave of financial scandals, yet
they were either not convinced of the widespread effects of scandals or considered them as unrelated
events, as evidenced by a relatively stable investor confidence index around a value of 85 (GAO 2002).
Revelations of further corporate and accounting scandals started in March 2002, continued through June,
and galvanized with the SEC complaint against WorldCom on June 26, 2002. The reported financial
scandals in May and June 2002 caused the UBS/Gallup Index for investor confidence to decline to an all-
time low of 46 in June (GAO 2002).
During this period of ambiguity, more than 30 reform bills were introduced by legislators and
regulators (Schroeder 2002). However, there were basically three competing reform proposals. Senator
Paul Sarbanes, chair of the Senate Banking Committee, sponsored a bill that would: (1) impose tougher
rules on the accounting profession and financial analysts; (2) boost the budget for the SEC and strengthen
its power to discipline corporate executives; and (3) create an oversight board with broad powers to oversee
audit functions. This bill was viewed as a sensible regulation that would combat financial scandals, and was
supported by consumer groups and investor activists, but was strongly criticized by leading Republicans
(e.g., Senator Phil Gramm) and the Bush administration as being too prescriptive. The second proposed
reform was a Republican bill sponsored by Congressman Michael Oxley that would create an independent
audit oversight board but with far fewer powers. This bill was viewed as a regulation with no teeth and an
enshrinement of the status quo, far weaker than the Senate bill, and was favored by many Republicans and
the accounting profession.
9
The third proposal was the SECs plan for a private regulatory board to regulate
public accounting firms. While the SEC proposal was supported by the Bush administration and
Republicans, it was viewed by many Democrats as a toothless tiger that would allow the accounting
profession too much influence over the proposed regulatory board.
10
During this ambiguous period of

8
intensive legislative debate, market participants received controversial signals from the House, the Senate,
the SEC, and the White House regarding the content, substance, and likelihood of the passage of any
Congressional reform. Thus, we do not make predictions for the four legislative events during the
ambiguous period (See Figure 1 and Table 1 for lists of these events).
Unfavorable Events
Two versions of the reform bill received Congressional attention and public support. The
Republican-backed House bill (Oxley), favored by the accounting profession and considered by many as
weak reform, and the tougher bill proposed in the Senate (Sarbanes) viewed as being too prescriptive and
harsh to the financial community and corporations. However, there were considerable uncertainties over
which one would prevail and if either one would be passed by Congress (Geewax 2002a). The Senate
considered the bill in the first week of July 2002. President Bush made a highly publicized speech to Wall
Street on July 9, 2002, which was viewed by many as simply tinkering with the SEC plan for a private
regulatory board and other proposals to regulate public accounting firms (Kulish 2002).
11
The extent of
disagreements between the Senate and the House bill, coupled with the limited time to compromise on
these differences in the first part of July 2002 and the ineffectiveness of the Presidents proposal, created
significant doubt that any reform bill would pass before Congress departed Washington for the August
recess (Geewax 2002a and Oppel 2002b). The possibility of the passage of a meaningful reform bill was
very remote, primarily because lobbyists and some leading Republicans had pledged to rewrite it when it
got to conference committee (Oppel 2002b). We posited that investors perceived these differences as a
signal of a decreasing likelihood of the passage of the Act (events of July 9, 15, 16, and 19 of 2002) and
thus, we predicted negative market reactions to these events.
Favorable Events
The Act emerged under circumstances that virtually ensured its passage in the last week of July
2002. First, since 2002 was a mid-term election year, Democrats used reported financial scandals as an
opportunity to push for a broader regulatory agenda. Second, the pervasiveness of reported financial
scandals made it difficult and risky for any politician, particularly pro-business Republicans, to block its
passage after a July 24 Conference report of a joint House-Senate Committee approval. Third, the bill was

9
finally renamed as the Sarbanes-Oxley Act by the conference committee on July 24, and included a
majority of provisions from the perceived tougher Senate bill, which made the Act a symbolic victory for
Democrats. Fourth, President Bush said on July 24 that he would sign the Sarbanes-Oxley Act of 2002,
which he called a victory for Americas shareholders and employees (Geewax 2002b). Finally, Congress
moved rather swiftly to pass the Act after the wave of financial scandals eroded investor confidence in the
capital markets. Events pertaining to the Conference report on July 24, the Congressional legislation on
July 25, 2002, sending the compromised bill to the president on July 26, 2002, and all rumors about the
president signing the compromised bill sent signals to the market that indicated the increasing likelihood of
the passage of the Act and the resolution of uncertainty about its provisions. We posited that investors
viewed these events as favorable and the capital market reacted to them positively.
Theoretical Argument and Hypothesis Development
In this section, we describe the theoretical argument that motivates our hypothesis development
and empirical analysis. One argument is that there is no need for policy interventions (regulations) because
product market competition provides incentives for firms to adopt the most efficient and effective corporate
governance mechanisms. Firms that do not adopt effective corporate governance are presumably less
efficient in the long-term and ultimately are replaced. However, the wave of financial scandals in the late
1990s and early 2000s demonstrated that market-based mechanisms alone could not solve corporate
governance problems. The capital markets hit rock bottom in the early 2000s primarily because market
correction mechanisms, lax regulations, and disclosure standards failed to protect investors and thus
diminished trust in the capital markets.
The Act, by improving investor confidence, provides a compelling setting for assessing the
shareholder wealth effects of mandatory disclosure and corporate governance regulations for at least three
reasons. First, the Act equally applies to, and is intended to benefit, all publicly traded companies. Some of
the provisions of the Act, which were not previously practiced by public companies, and which are
intended to benefit all companies, are: (1) the creation of the PCAOB to oversee the audit of public
companies and to improve the perceived ineffective self-regulatory environment of the auditing profession;
(2) improving corporate governance through more vigilant board of directors and responsible executives;

10
(3) enhancing the quality, reliability, transparency, and timeliness of financial disclosures through
executive certifications of both financial statements and internal controls; (4) prohibiting non-audit
services; (5) regulating the conduct of auditors, legal counsel, and analysts and their potential conflicts of
interest; and (6) increasing civil and criminal penalties for violations of security laws. If the Act improves
corporate governance, financial reporting, audit functions, and increases criminal penalties for willful
misrepresentation of financial information (which was previously unachievable through market
mechanisms), then the Act could lead to an increase in investor confidence, a decrease in the cost of capital,
an increase in firm value, and greater benefits to all public companies (Donaldson 2005; Turner 2005).
Second, the mandatory level of compliance with provisions of the Act regarding corporate
governance and accounting and auditing practices is much higher that presumably optimized level for all
public companies. This new mandated level in the post-Act period is much higher than the previously
practiced level primarily because of additional requirements for executive certifications of financial
statements and internal controls, the creation of the PCAOB, prohibiting non-audit services, more vigilant
audit committee oversights, more transparent and timely financial disclosures, and stiffer penalties for
corporate malfeasance among others. The achievement of this mandatory level of governance is required by
the Act and enforced by SEC-related implementation rules to restore investor confidence and trust in the
capital markets. In the absence of externalities, the achievement of the regulated level of governance and
financial reporting and auditing practices should benefit and generate positive return, on average, for all
public companies implying either that the mandated level of governance is much higher than the presumed
optimized level and/or there are strong spillover effects from the Act (e.g., improved investor confidence,
reduced cost of capital). Thus, all public companies will benefit from either the spillover effects of the Act
and/or the achievement of high levels of mandated governance.
Finally, the compliance costs vary depending on the firms level of compliance with the provisions
of the Act prior to its passage. Indeed, a recent survey conducted by the Business Roundtable shows that
the costs of compliance with the Act range from $1 million to more than $10 million with 22 percent of
surveyed companies estimated costs of more than $10 million (Business Roundtable 2004). The immediate
and measurable compliance costs of the Act are: (1) the cost of certifications and sub-certifications by those

11
involved with financial reporting; (2) costs associated with reporting and attestation requirements of
internal controls; (3) management and staffing requirements, such as the cost of hiring independent
members of the board of directors, a financial expert for the audit committee, legal counsel for monitoring
compliance, setting up a whistleblower program, and training employees; and (4) opportunity costs
associated with changes in corporate governance mechanisms and accounting and auditing practices to
comply with provisions of the Act. Recent anecdotal evidence (CRA 2005; Turner 2005) shows that the
cost of compliance with Section 404 of the Act on internal controls is, on average, about 0.10 percent of the
total revenue of public companies. Furthermore, SEC chairman William H. Donaldson has recently stated
that I believe it important to note that a substantial portion in the [compliance] cost may reflect initial
start-up expenses as many companies, for the first time, conducted a systematic review and documentation
of their internal controls (Donaldson 2005). We view these initial start-up expenses as a one-time cost of
compliance in our model of determinants of costs and benefits of the Act.
Like any regulations, shareholder wealth effects of the Act are a function of both the expected
benefits and costs imposed on public companies with the passage of the Act. Overall, if the induced
benefits of the Act exceed its imposed compliance costs, then we would expect a positive impact on
shareholder wealth resulting from positive market reactions to the Congressional events that increased the
likelihood of the passage of the Act and resolved uncertainties about its provisions. Alternatively, if the
imposed compliance costs exceed the induced potential benefits, we would expect a negative effect on
shareholder wealth resulting from negative market reactions to those events. Since the costs and benefits of
compliance with provisions of the Act are not observable a priori, the net benefit can be measured in terms
of any changes in market performance from the imposed regulatory changes. Although the direction of
capital market reactions to legislative events leading up to the passage of the Act is an empirical issue,
based on our discussion of Congressional events in the previous section and consistent with Espahbodi et
al. (2002) and Lys (1984), we formulate our first hypothesis as follows:
HYPOTHESIS 1. The capital markets reacted positively (negatively) to legislative events that
increased (decreased) the likelihood of the passage of the Act.

12
The overall benefit induced by the Act in improving investor confidence must be weighted with
the imposed compliance costs at firm-specific. Brown and Caylor (2004) find that good (poor) corporate
governance associated with higher (lower) profits, less (more) risk, less (more) stock price volatility, higher
(lower) values and larger (smaller) cash payouts. The Act requires a poor (good) governance firm to make
many (few) changes to its pre-Act governance structure. Thus, compliance with provisions of the Act
pertaining to corporate governance, financial reporting, and audit functions would be more costly to poor
governance firms than good governance firms. We assume that all public companies affected by the Act
were in equilibrium in the pre-Act period. The Act raised the average return for all firms by improving
investor confidence in the capital markets, a pure externality effect that is not firm specific. Nonetheless,
for less-compliant (denoted by LC) firms, ex ante, the imposed compliance costs outweighed the induced
benefits. Alternatively, for more-compliant (denoted by MC) firms, ex ante, the induced benefits
outweighed the imposed costs. Thus, LC firms incurred more costs to comply with the new corporate
governance reforms (the Act, SEC-related implementation rules) but they may still show positive abnormal
returns because the positive pure externality (induced by improvement in investor confidence) outweighs
the excess of costs over benefits. MC firms, on the other hand, are expected to show higher positive
abnormal returns because of the positive pure externality effect.
More specifically, a formal argument is presented as follows in our model. Every firm maximizes
its stock price (p) by maximizing net profits defined as earnings (e) minus variable costs of compliance (v),
and one time fixed compliance costs (f) of changing the firms corporate governance structure, financial
reporting process and auditing functions to comply with the provisions of the Act. In terms of
organizational complexity, there are several types () of firms ranging from simple organizational structure
and to very complex organizational structure. Their choice variable is the level of continuous compliance
() with the provisions of the Act and they operate within a given set of regulatory parameters. Firms type,
compliance level, and the regulatory environment all affect prices in the following price function:
p =
x
* (1+) * {e ( v * * ) } (f * ) (1)
Here,
x
represents the price earnings multiple; it can take any positive value. For ease of computation but
without loss of generality, we normalize the variables, where their ranges are restricted as follows:

13
e is normalized to 1 for the firm with highest earnings;
v is expressed as a proportion of e and ranges from 0% to 100%, or 0 to 1 in fractions;
ranges from 0 for the simplest firms to 1 for the most complex firms; and
is a continuous variable, meaning that a firms compliance level can be none, partial or
full.
There is a pure externality effect of the Act which is crucial to our argument. The Act was intended to
improve investor confidence by increasing the price multiples from
b
before the Act to
a
after

the Act
(where
a
>
b
). This increase in
x
(a pure externality effect) is caused by a lowering of cost of capital due
to an increased probability that the financial statements are more reliable after the Act (Cheng et al. 2004).
The interaction of v * * in the cost structure is justified as firms with simple organizational
structure will find it easy and less costly to comply. Similarly more compliance is more costly. The choice
variable can be thought of zero (0) percent if the firm decides not to comply with any of the provision of
the Act and 100 percent if the firm decides to comply fully with the Act. Compliance variable can take
any intermediate value as firms can comply with the easy provisions that avoid major damages and violate
the more tedious provisions of the law that are associated with lesser damages. This is an important choice
that firms make in two respects. First, compliance comes at costs v that can be avoided if a firm decides not
to comply. Second, compliance sends a signal to the investors who revise their probability about the
accuracy of financial statements upwards. Specifically, the ranking of adjusted price-earnings ratio for
different combinations of environment and compliance are as follows:

a
* (1+) >
a
and
b
* (1+) >
b

The first order condition for profit maximization is obtained by setting:
p / = 0
[
x
* {e ( v * * )} +
x
* {e ( v * * )} ( f * )]/ = 0

x
v +
x
e 2
x
v

= 0

opt
= 1/2(e/v -1) . (2)

14
Equation 2 represents the optimal level of compliance, which is independent of the externality
(
b
x
a
x
/ pre- and post-Act). Comparative statistic implies that the degree of compliance, , is: (1)
decreasing in complexity of firms type, implying that firms with higher will be in less compliance; and
(2) increasing in firms earnings and better regulatory environment implying that many firms that found it
optimal not to comply before the Act could find it optimal to comply after the Act. Note that the second
order condition that
2
p /
2
= 2
x
v < 0 is true because all three variables
x
, v, and are positive by
definition and their product with -2 is therefore less than 0.
We introduce some additional notation to clarify the implication of the propositions above.
Consider any 2 specific values of , M and L such that M < L, i.e. M has a simpler organizational structure
and is, therefore, closer to compliance with provisions of the Act ex-ante; L has a more complex structure
and is farther from compliance with provisions of the Act prior to its passage, which indicates that the
optimal level of compliance
M
opt
>
L
opt

Substituting optimal value of compliance from equation (2) into equation (1),
p
x

opt
=
x
e
x
e +
x
v +
x
e
2
/v
x
e (
x
e
2
/v -2
x
e +
x
v) f
p
x

opt
=
x
(e
2
/v + 2e + v) f (3)
The difference in price reaction of more compliant firms (p
a
M
p
b
M
), where a is after the Act and b is
before the Act, and less compliant firms (p
a
L
p
b
L
) is as follows:
(p
a
M
p
b
M
) (p
a
L
p
b
L
) =
[{
a
(e
2
/vM + 2e + vM) fM} {
b
(e
2
/vM + 2e + vM) fM}]
[{
a
(e
2
/vL + 2e + vL) fL} {
b
(e
2
/vL + 2e + vL) fL}]
= (
a

b
)*( L M)*( e
2
/vML v)
(p
a
M
p
b
M
) (p
a
L
p
b
L
) = (
a

b
)*( L M)*( e
2
v
2
ML) /vML (4)
We know that by definition the following inequalities are true:
(i)
a
>
b
, which implies that (
a

b
) is positive;
(ii) the organization complexity L > M, which implies that (L - M) is positive;

15
(iii) e

> v > 0, which implies that e
2
> v
2
. In addition, M, L (0,1) which implies that ML<1 and,
therefore, e
2
> v
2
ML. The denominator term, vML, is likewise positive
Thus, all terms on the right hand side of equation (4) are positive supporting our propositions that:
(p
a
M
p
b
M
) (p
a
L
p
b
L
) > 0 (5)

Alternative Specifications of Optimal Level of Compliance Function:
Note that a difference in firm complexity is not necessary to show (p
a
M
p
b
M
) (p
a
L
p
b
L
) > 0. If
firms with similar complexity differed in the level of compliance merely because of a difference in their
cost structures, the above inequality can be shown to hold. Consider, for example, the following two
slightly modified situations where:
1. Firms with similar organizational structure (M=L) differ in their compliance level with provisions
of the Act, with firm J is more compliant than firm K prior to the Act because of a difference in
their variable cost of compliance, i.e.,
J
v <
K
v . Then it can be readily shown that
(p
a
J
p
b
J
) (p
a
K
p
b
K
) ( )( )
)
`

K J
2
K J
2
J K
4
1
v v
v v e
v v
b a
(6)
Furthermore, we know that:
(i)
a
>
b
, which implies that (
a

b
) is positive;
(ii) the variable cost
K
v >
J
v , which implies that ( )
J K
v v is positive;
(iii) e

> v > 0, which implies that e
2
>
K J
v v . Therefore, e
2
>
2
K J
v v .
These conditions indicate that all bracketed terms on right hand side of equation (6) are positive.
Thus, (p
a
J
p
b
J
) (p
a
K
p
b
K
) > 0 (7)

2. Firms with higher earnings are more compliant, where firm x is more compliant than firm y prior
to the Act and
X
e >
Y
e .
It can be shown that:

16
(p
a
X
p
b
X
) (p
a
Y
p
b
Y
) ( )( )
|

\
| + +
=

v
v e e
e e
b a
2
4
1
Y X
Y X
(8)
Furthermore, we know that:
(i)
a
>
b
, which implies that (
a

b
) is positive;
(ii)
X
e >
Y
e , which implies that ( )
Y X
e e is positive;
(iii) e

> v > 0 and e

> > 0. Therefore, ( ) 0 2
Y X
> + + v e e


These conditions indicate that all bracketed terms on right hand side of equation (8) are positive.
Thus, (p
a
X
p
b
X
) (p
a
Y
p
b
Y
) > 0 (9)
Numerical examples of Equations 5, 7, and 9 are provided in Appendix B. As shown in these
equations, regardless of what drives the optimal compliance level, price change is always higher for more
compliant firms than for less compliant firms. This provides a basis for our second hypothesis. Evidence
consistent with our cross-sectional prediction provides an ex post indication that the observed market
reaction is attributable to a firms characteristics on corporate governance, financial reporting, and audit
functions, which forms the logic behind our cross-sectional hypothesis (stated in alternative form):
12

HYPOTHESIS 2. The observed positive capital market reactions are higher (lower) for firms with
more (less) effective corporate governance, financial reports, and audit functions prior to
the passage of the Act.
4. Research Design
Test of First Hypothesis (Time-Series Analysis)
The Act is applicable to all publicly traded companies. Therefore, we expect the stock market as a
whole to react positively (negatively) to the favorable (unfavorable) events around the passage of the Act,
as discussed in the previous section. Our initial test focuses on two broad based market indices, namely the
S&P 500 index and the Value-line index. The test period for our events is from February to July 2002. For
each index, abnormal returns around the relevant events are calculated using the constant-mean return
model.
13
The estimation period for the normal (benchmark) return starts from 142 trading days before
February 2, 2002 and ends 21 trading days before that date. The event-day abnormal returns (AR) are then
calculated as the days gross return minus the normal return. The 3-day cumulative abnormal returns (3-day

17
CARs) are obtained by adding the abnormal returns on the event day, one day before the event, and one day
after the event.
14

Consistent with Ali and Kallapur (2001) Espahbodi et al (2002), and Rezaee and Jain (2005), we
examine the average impact of the 12 Congressional events on stock prices and for all 12 events for our
sample using the following model:

=
+ + =
12
1 j
j j j o t
e D a R (10)
where:
t
R = average daily stock return of sample firms on date t;
o
a = the intercept coefficient that represents the average daily stock return across the 485 non-
event trading days in 2001-2002 for the S&P 500 portfolio;
j
= the effect of the even j on the portfolio raw return, which represents mean-adjusted returns
of the portfolio raw return for event j minus the portfolio mean return over the non-event
days;
j
D = a dummy variable that takes a value of 1 for the event window (t = -1, t = 0, t = +1) relative
to the announcement date of event j and 0 otherwise. Our examined 12 events classified into
three categories of ambiguous, unfavorable, and favorable events are listed in Table 1; and
j
e = random disturbance, which is assumed to be normal and independent of the event.
We estimate equation (10) over the 485 trading days of stock return data for 2001 and 2002 using raw
returns for S&P 500 firms. Unlike Espahbodi et al. (2002) and Rezaee and Jain (2005), we did not adjust
equation (10) for market return because the Act was intended for all public companies and the entire market
is affected by the Act. We also estimate equation (10) for our three event classifications: (1) ambiguous
events period (events 1-4, 91 trading days); (2) unfavorable events period (events 5-8, 9 trading days); (3)
favorable events (events 9-12, 4 trading days); and (4) for all Congressional 12 events period (events 1-12,
115 trading days).
15


18
Test of Second Hypothesis (Cross-Sectional Analysis)
We perform a cross-sectional analysis to investigate determinants of shareholder wealth effects of
the Act by identifying the firm-specific characteristics that influence the magnitude of stock price reactions
to Congressional events that increased the likelihood of the passage of the Act. The cross-sectional analysis
simultaneously analyzes the impact of firm variables on abnormal returns and cumulative abnormal returns
in a regression framework. Because the security performance reflects the firms ex ante, shareholder
wealth effects of regulations (the Act), Congressional events leading up to the passage of the Act can
provide a unique empirical setting through which we can draw inferences about the otherwise unobservable
costs and benefits of compliance with the provisions of the Act. This is important because compliance with
applicable laws and regulations (the Act) is a key component of corporate governance and control
mechanisms. Our cross-sectional analysis provides evidence pertaining to the determinants of shareholder
wealth affects of regulations such as the Act.
Dependent Variable
We use the standard event study methodology for the cross-sectional analysis as outlined in
Campbell, Lo, and MacKinlay (1997).
16
The dependent variable for the first regression is abnormal returns
(AR
it
) defined as follows under the Capital Asset Pricing Model (CAPM):
) (
^
f
Mt f it it
R R R R AR = (11)
where R
it
is the return on stock i on event date t; -hat is the stocks beta, which measures the sensitivity of
a company's stock price to the fluctuation in the Standard & Poor's 500 (S&P 500) Index, calculated for a
5-year period ending in June 2002 using month-end closing prices including dividends; R
f
is the risk-free
rate of return from treasury bill (t-bill); and R
Mt
is the return on S&P 500 Index on the event date. The
dependent variable for our second regression is cumulative abnormal returns (CAR
it
), which is obtained by
adding the abnormal returns on the event date, one day before the event and one day after the event.
Test Variables
Provisions of the Act, as discussed in Section 3 of the study and summarized in the Appendix A,
are expected to affect the three fundamental attributes of public companies, namely corporate governance,

19
financial reporting, and audit functions. Standard & Poors (S&P), on October 15, 2002, released its
Transparency and Disclosure (T&D) practices of S&P 500 firms as of June 30, 2002. The T&D scores
consist of the following three dimensions of corporate governance: (1) ownership structure and investor
rights (OSIR); (2) board and management structure and process (BMSP); and (3) financial transparency and
information disclosure (FTID). These three dimensions are developed based on 98 information items
(attributes).
17
We use the three S&P dimensions of corporate governance (OSIR, BMSP, FTID) along with
other explanatory variables in our cross-sectional analysis in order to determine the relation between the
observed capital market reactions and firms financial attributes and corporate governance characteristics.
18
Table 2 defines measures related to these characteristics along with their data source, and they are further
discussed in the following paragraphs.
Measures of Corporate Governance
Corporate governance addresses the potential conflicts of interest and agency problems induced by
the separation of ownership and control in corporations (Fama and Jensen 1983; Jensen 1986). These
agency problems may cause conflicts of interest and information asymmetry, which can be costly to
shareholders (Shleifer and Vishny 1997). The wave of financial scandals indicates that there was a serious
problem in public companies corporate governance in terms of an imbalanced power-sharing relationship
between investors and managers. The Act changes the balance of power between directors, executives, and
investors by shifting significant responsibilities from management to the audit committee. These changes
are expected to motivate and reinforce corporate boards, audit committee members, and executives to
become more vigilant, transparent, and accountable for financial reports (see Appendix A).
Recent studies (e.g., Khanna, Palepu, and Srinivasan 2003; Durnev and Kim 2002; Cheng,
Collins, and Huang 2003) have employed S&Ps T&D scores as proxies for corporate governance and
financial reporting attributes, and identify several concerns with using T&D rankings.
19
These concerns are
less severe in our study primarily because we use composite T&D scores developed for S&P 500 firms, and
we employ other qualitative and quantitative measures of financial reporting (accruals, debt-to-equity ratio,
market-to-book ratio of common equity, size, and the ratio of non-audit fees to total auditor fees) in
addition to T&D scores. Furthermore, we believe S&P scores are more objective than the subjective analyst

20
ratings of firm level corporate governance practices used in prior research (La Porta et al. 1998). The three
dimensions of corporate governance rankings range from 1 for very weak corporate governance
processes and practices, to 10 for very strong corporate governance processes and practices. We posit
that firms with higher corporate governance scores (OSIR and BMSP) are more positively affected by the
Act.
Measures of Financial Reporting
High-quality financial reports enable investors to better assess the risk and return associated with
investments through more accurate and complete financial information. Many provisions of the Act (see
Appendix A) are aimed at improving quality, transparency, and reliability of financial reports of public
companies. Examples of the financial reporting effects of the Act are executive certifications of financial
statements and internal controls, increased disclosure of events affecting companies, elaboration of non-
GAAP financial statements and discussion of off-balance sheet financing and contingent liabilities. The
increased transparency of financial reports reduces the possibility that managements behavior is
opportunistic and such a behavior is not discovered by auditors, analysts and investors in a timely manner.
We use two measures of financial reporting including: (1) S&P T&D scores for financial transparency and
disclosure (FTID);
20
and (2) the absolute value of total accruals (ATAC) as proxies for the quality,
reliability, and transparency of financial reports. We predict that firms with higher FTID scores are more
positively affected by the Act. Prior research (Cohen et al. 2004; Frankel, Johnson, and Nelson 2002) use
magnitude and sign of accruals as a proxy for earnings quality in the examination of earnings management.
Thus, we expect a negative relation between the absolute value of total accruals and the observed market
reactions to the Act.
Measures of Audit Functions
Investor trust in auditors judgments, objectivity, and reputation plays an important role in
substantiating audit functions as value-added services. Several provisions of the Act (see Appendix A) are
aimed at improving audit quality, effectiveness, and credibility including auditor independence, retention of
audit evidence, and oversight of the PCAOB. Frankel et al. (2002) argue that the performance of non-audit
services simultaneously with audit services can strengthen the auditors economic bond with the client, and

21
provide incentives for the auditor to acquiesce to client pressure. Thus, disclosure of auditors fees and the
breakdown of total fees to audit and non-audit service fees can inform investors about audit objectivity and
financial reporting quality.
21
The Act, by reducing managements influence on audit tenure and prohibiting
non-audit services, can reduce conflicts of interest between management and auditors, which in turn can
improve audit credibility and quality. We use the ratio of non-audit fees to total auditor fees as a proxy for
the credibility of audit functions, and predict a negative relation between this ratio and the observed capital
market reactions to the Act.
Prior research (e.g., DeAngelo 1981; Beatty 1989; Craswell, Francis, and Taylor 1995) suggest
that audit quality varies among public accounting firms and that both auditor reputation and brand name
play an important role in determining the audit fee. Recent studies (Chaney and Philipich 2002; Asthana,
Balsam, and Krishnun 2003; Callen and Morel 2003; Rezaee, Hunt, and Lukawitz 2004) document that
Arthur Andersen clients experienced negative abnormal returns over a period of negative news disclosure
about Enron and Andersen. Furthermore, Rezaee et al. (2004) find a much stronger negative market
reaction to Andersen-specific events (e.g., document shredding, guilty verdict) than to Andersen-client
events that were damaging to Andersens reputation. Thus, we also use an Arthur Andersen (AA) variable
as a proxy for auditors reputation and credibility, and predict a negative relation between the AA variable
and the observed capital market reactions to the Act.
Control Variables
To determine the possible impact of the Act on corporate governance, financial reporting, and
audit functions, we control for several equity characteristics (firm size, performance, and leverage) that
have been documented in prior research (e.g., Fama and French 1993) as being associated with securities
return. We control for firm size using market capitalization. Large firms often have more resources and are
better equipped to observe high compliance costs of regulations such as the Act, and thus we predict size
variable to be positive. We control for firm performance (risk and expected growth) using market-to-book
ratio of common equity (Collins and Kothari 1989; Fama and French 1993), and expect this variable to be
positive. We control for financial leverage by using debt-to-equity ratio. The agency theory (Jensen and
Meckling 1976) suggests that firms have more incentive to offer increased levels of monitoring when

22
leverage increases. Thus, highly levered firms are more likely to benefit from monitoring mechanisms
provided by the Act in order to ensure compliance with the restrictive covenants specified in debt
agreements. We predict a positive relation for leverage. We also control for the cost of compliance with
provisions of the Act As discussed in Section 3, the compliance cost is higher for less-compliant firms than
more-compliance firms prior to the passage of the Act. CRA (2005) and Turner (2005) estimate the cost of
compliance with Section 404 of the Act (internal controls) about 0.10 percent of the total revenue for public
companies whereas Section 404 additional audit fees (audit report on internal control over financial
reporting) is about 0.02 of the total revenue. We use audit fees as a proxy for the cost of compliance with
the Act since audit fees are estimated to constitute a large portion of the total compliance costs. We predict
a negative relation for the audit fee variable (AUT) as a proxy for the compliance cost.
Regression Models
We developed two regression models based on cross-sectional variables as follows:
it it it it it it
it it it it it it
Aut LEV MTB MAC AA
NATA ATAC FTID BMSP OSIR AR


+ + + + +
+ + + + + + =
10 9 8 7 6
5 4 3 2 1
(12)
it it it it it it
it it it it it it
Aut LEV MTB MAC AA
NATA ATAC FTID BMSP OSIR CAR


+ + + + +
+ + + + + + =
10 9 8 7 6
5 4 3 2 1
(13)
Our sample for the cross-sectional analysis consists of 415 S&P 500 firms with available data on test
variables (40 firms were excluded for non-existence of S&P and T&D scores, and another 40 were
excluded for unavailability of data on auditor fees). The presence of the cross-sectional heteroscedasticity
and the contemporaneous correlation of the residuals is likely in our regression models (equations 12 and
13) primarily because Congressional events leading to the passage of the Act affect all sample firms. To
address these issues, we use the Generalized Method of Moments (GMM) estimation. The GMM
estimation, by using a correct variance-covariance matrix based on residuals, overcomes the two common
shortcomings of the standard OLS estimation when the errors are heteroscedastic or have non-constant
variance or correlated error terms.
Panel A of Table 3 provides descriptive statistics (mean, median, standard deviation, minimum,
maximum) for all test and control variables, and Panel B reports correlations between those variables. For

23
415 companies in our cross-sectional regressions, (1) the average score for ownership structure and investor
rights (OSIR) is 5.65; (2) the average score for board and management structure and process (BMSP) is
8.19; (3) the average score for financial transparency and information disclosure (FTID) is 8.14; (4) the
mean of the absolute value of total accruals scaled by total assets is 8.68 percent; (5) the average ratio of
non-audit service fees to total auditor fees (NATAA) is 52 percent; and (6) the Arthur Andersen variable has
an average of 16.16 percent. The average market capitalization is 0.0179 trillions of dollars. Our sample
firms seem to have moderate leverage with an average of 57 percent debt-to-equity ratio. The average
market-to-book ratio of common equity, a measure of growth and risk is about 3.68 and the average audit
fee of $3.17 million.
5. Results
Time-Series Analysis
Table 4 reports daily abnormal returns (ARs) and three-day cumulative abnormal returns (CARs)
along with their predicted signs around each of the 12 events and for each of the three designated event
period of ambiguous, unfavorable, and favorable.
22
As indicated in Table 4 and consistent with Hypothesis
1, almost all events that we predicted to increase (decrease) the likelihood of the passage of the Act
appeared to contain both unanticipated and signaling news to the extent that they affected stock prices of
public companies and could be detected by our models. Of the eight dates, for which we predict whether
the event will increase or decrease the likelihood of the passage of the Act, the sign of daily abnormal
return conforms to our prediction for seven dates. The CARs for the calendar period starting from the
beginning of our sample events to the end are plotted in Figure 2. This Figure shows that the declining
trend of the market was arrested, and the market started moving up around the passage of the Act.
Furthermore, the predicted unfavorable events (numbers 5, 6, 7, and 8), with a decreasing probability of
passage of the Act, are associated with the market decline period whereas the predicted favorable events
(numbers 9, 10, 11 and 12), with an increasing likelihood of passage, are related to the market-increasing
period. Panel B of Table 4 reports that the average daily abnormal returns during the entire test period
(events 1-12) are negative and not statistically significant.

24
Panel A of Table 4 shows ARs and CARs results of our two constantmean return models based
on market indices (S&P 500, Value-Line) and portfolio of stocks. Columns 4 and 5 of Panel A present
both ARs and 3-day CARs results of value-line index,
23
whereas the last two columns show ARs and CARs
based on the portfolio of 500 firms in the S&P 500 for each of the 12 events. Panel B of Table 4 present
average daily abnormal returns (ADAR) for both models for each of the three categories of the events: (1)
ambiguous events (events 1-4, February 14 to June 25); (2) unfavorable events (events 5-8, July 9 to July
19); (3) favorable events (events 9-12, July 24 to July 30); and (4) for all events (events 1-12, February 14,
2002 to July 03, 2002). Column 3 shows ADAR for value-line index whereas column 4 presents ADAR for
the portfolio of S&P 500 stocks.
We generally detected negative capital market reactions to ambiguous events (the first category of
events), particularly event number 3 regarding the SECs plan for a private regulatory board to regulate
public accounting firms. The detected abnormal returns for these events except event number 3 are not
statistically significant, suggesting investors did not view the early Congressional bills as value-relevant or
significant in addressing financial scandals (see panel A of Table 4). The SEC proposal (event 3) was
considered by investors as an ineffective reform that would allow the accounting profession too much
influence over its proposed regulatory board. Panel B of Table 4 shows that the average daily abnormal
returns during the ambiguous events period (events 1-4) was negative and statistically insignificant
indicating no market reactions to these events.
The second category consists of unfavorable events (5, 6, 7, and 8) that either decreased the
probability of the passage of the Act or that provided information regarding the difficulties in reaching
agreements on the final provisions of the Act in the House and the Senate. We detected negative abnormal
returns for these events as predicted. We calculated total cumulative abnormal returns during the
unfavorable event period (July 9July 19) for both the S&P 500 and value-line indexes. Total cumulative
abnormal return for the S&P 500 and value-line indexes during the unfavorable event period are -13.49 and
-11.98 percent (not reported), with the t-statistic of -3.54 and -2.80, which are significant at the 1 and 5
percent levels respectively.
24
Investors viewed these events as bad news (unfavorable) and the capital
market reacted negatively to these events. Particularly, the average daily incremental return on July 9 and

25
19, 2002 is -2.41 percent and -3.78 percent, which are significant at the 5 percent and the 1 percent levels
respectively. President Bush, on July 9, 2002, went to Wall Street and spoke in support of Securities Law
reform, which was viewed negatively by the market participants (3-day CAR for both models is negative
and statistically significant). On July 19, 2002, there were significant uncertainties regarding the form,
content, and possibility of passage of the Act, and thus managers on the part of the House and the Senate
met to possibly reconcile differences between the House bill and the Senate amendment. This event sent a
signal to the market that the Act may not be forthcoming and therefore the market reacted negatively to this
event (daily and cumulative abnormal returns are statistically significant at 1 percent level). Panel B of
Table 4 indicates that the average daily abnormal returns for both value-line index and portfolio of stocks
models were negative and significant at the 1 percent level (-1.33 and -1.51 respectively) during the
unfavorable events period (events 5-8).
The last group, consisting of favorable events (9 through 12) unambiguously increased the
probability of the passage of the Act, and the market reacted positively to these events. During July 24 to
July 30, the House and Senate reached a compromise on legislation, and Congress passed the Act by a vote
of 4233 in the House and 990 in the Senate; the compromised bill was sent to the president to sign into
law and was eventually enacted on July 30, 2002. We detect positive market reactions to these favorable
events, suggesting that investors view provisions of the Act as beneficial to them and important in restoring
their confidence in corporate governance, the financial reporting process, and audit functions. Panel B of
Table 4 shows that the average daily abnormal returns for value-line index and portfolio of stocks models
during the favorable events period (events 9-12) are 1.20 and 3.11 respectively and are both significant at
the 1 percent level. Total CAR for this event period (July 24July 30) is +12.95 percent with t-statistic of
+4.56, which is significant at 1 percent level (not reported). The value-line index abnormal return and the
average daily incremental returns of portfolio of S&P 500 companies on July 24, 2002 are 4.34 percent and
5.78 percent respectively, which are statistically significant at 1 percent level. On July 24, 2002 the
Congressional Conference Committee reached an agreement on comprehensive reform legislation (the Act)
and issued a conference report, which was perceived as an indication that the Act would be passed by
Congress and signed into law by the President. The market viewed the conference report as a signal of the

26
increasing possibility of passage of the Act and reacted to this event positively. The positive 3-day CARs
for July 25, 26, and 30, 2002, during the last week of legislative events are statistically significant
indicating positive market reactions to these events.
Robustness Checks
Results of our time-series analysis indicate that the capital market reacted positively (negatively)
to events that increased (decreased) likelihood of the passage of the Act. We conduct two robustness tests
to validate these results that are likely to be offset by the likelihood of the existence of cross-sectional
correlation among the sample firms. First, we use two alternative market return measures of the Russell
1000 index and the Russell 3000 index in addition to S&P 500 and value-line indices. Consistent with
Chaney and Philipich (2002), we find that all four market return measures produce quantitatively similar
results. For example, untabulated results for CARs using Russell 1000 and 3000 indexes are negative and
statistically significant for events 3, 5, 6, and 8, and positive and statistically significant for events 9, 10,
11, and 12. These findings are consistent with and validate the results presented in Table 4.
Second, we divide our sample firms into two portfolios as a first pass test for our second
hypothesis that firms which were closer to compliance with provisions of the Act regarding corporate
governance, financial reporting, and audit functions experience more positive capital market reactions than
firms which were far from compliance. First, we form portfolios of more-compliant (less-compliant) firms
based on the measure of whether firms were closer to (far from) compliance with provisions of the Act
prior to its passage. We use measures of S&Ps FTID scores to establish these portfolios. Firms with the
score of higher than the median (8, see panel A of Table 3) are classified as the more-compliant portfolio,
and firms with a score of lower than the median are included in the less-compliant portfolio. Second, we
calculate excess returns for these two portfolios using the market model (see equation 10).
25
These two
portfolios should show zero (0) excess returns, if they do not outperform the market. The differences in
performance of the two portfolios should also be zero, if the induced net benefits from the passage of the
Act are the same for both portfolios. We reject the null hypothesis of zero and/or the same abnormal returns
for these two portfolios. This analysis should address some of the problems of cross-sectional correlation
and provides reassuring evidence on the robustness of our research design and lends credibility to the

27
possibility that the Act induced more net benefits to firms that were close to compliance with provisions of
the Act prior to its passage. Results (not reported) indicate that (1) both portfolios experienced net benefits
from the passage of the Act, and (2) the more-compliant portfolio outperformed the less-compliant
portfolio by about one percent more excess returns and the difference is statistically significant at the 1
percent level.
Cross-Sectional Analysis
Our cross-sectional analysis examines whether the magnitude of positive price reaction to
favorable events leading up to the passage of the Act varies with firm corporate governance characteristics,
financial reporting attributes, and audit functions. Table 5 reports regression results for each of the four
favorable events (events 8-12 of Table 4) and for the entire favorable events period. Each column in Table
5 reports the coefficients, standard error, significance level, number of observations, and adjusted R-square
for each of the four favorable events and all four favorable events.
26
The adjusted R-square for the
abnormal return equation is 4.32 percent and for the CARs regression is 12.17 percent for all four favorable
events. The regression results support our hypothesis that firms: (1) with more effective corporate
governance measured by S&Ps composite scores for board and management structure and process (BMSP)
are more positively affected by the passage of the Act; (2) with more reliable and transparent financial
reports measured in terms of S&Ps composite scores for financial transparency and information disclosure
(FTID) and less the absolute value of total accruals (ATAC) are more positively affected by the passage of
the Act; and (3) with less credible audit functions as indicated by a higher ratio of non-audit fee to total
auditor fees (NATA) are more negatively affected by the passage of the Act.
We find a positive relation, as predicted, between the corporate governance variables and the
observed capital market reactions to the Act. The coefficients for the corporate governance variable
(BMSP) are positive and statistically significant for the CARs model. This evidence supports our
hypothesis, that companies that were closer to compliance with the corporate governance provisions of the
Act prior to its passage, on average, experienced greater positive abnormal security prices. Our results are
consistent with those of Li et al. (2004), who suggest that the Act likely will prove more costly for firms
with a higher proportion of dependent audit committee members as an indication of less effective

28
corporate governance prior to the passage of the Act. Prior research (e.g., Shleifer and Vishny 1986;
Agrawal and Mandelker 1990) documents that large outside blockholders have greater incentives to
monitor managers. However, we did not detect a statistically significant relation between the ownership
structure and investor rights (OSIR) variable and the observed abnormal returns experienced by public
companies resulting from the passage of the Act.
We find a positive and significant relation between the financial transparency and information
disclosure (FTID) variable and the observed capital market reactions to the Act and a negative and
significant association between absolute value of total accruals (ATAC) and detected abnormal returns. The
coefficients for the financial transparency and information disclosure (FTID) variable, for each of the
favorable events, for the daily abnormal returns regression and the cumulative abnormal returns regression
are statistically significant. The coefficients for the absolute value of total accruals (ATAC) are negative
and statistically significant. The negative relation between ATAC and the detected abnormal returns can be
interpreted as the capital market might view firms with higher accruals as having more opportunities to
engage in earnings management activities. These results suggest that firms with more reliable and
transparent financial disclosures experienced higher positive market reaction around events that increased
likelihood of the passage of the Act.
We find a negative and significant relation between the ratio of non-audit service fees to total
auditor fees (NATA) and the observed abnormal returns around events leading up to the passage of the Act.
The coefficients for the NATA variable for all events except event 12 (July 30, 2002) for the CARs
regressions and the daily ARs regressions are statistically significant. The Acts provisions on audit
functions address the important issue of the economic bonding and potential conflicts of interest that may
occur when auditors contemporaneously provide audit and non-audit services for their clients. Several
studies have also investigated this important issue of auditor independence (Frankel et al. 2002; Kinney and
Libby 2002; Chaney and Philipich 2002; Ashbaugh, LaFond, and Mayhew 2003). Nevertheless, there is no
consensus that the performance of non-audit services has a significant deterioration effect on audit quality
and earnings quality. Our findings of a negative coefficient for NATA can be interpreted in two ways. The
performance of non-audit services simultaneously with audit services might be viewed by the market as the

29
evidence that auditors controversial economic bond with their clients could adversely affected audit
credibility. Alternatively, the observed negative association can be interpreted as market participants
negatively viewing the loss of the perceived value-enhancing of non-audit services post-Act. We find no
statistically significant association between the observed capital market reaction to the Act and the firm
being audited by Arthur Andersen.
We detect positive relation between three of the four control variables (MAC, MTB, and LEV) and
the observed abnormal returns. Coefficients for growth (MTB), market capitalization (MAC), and leverage
(LEV) are statistically significant, indicating that larger and more levered and growth firms are positively
affected by the passage of the Act. The detected positive coefficient for leverage variable can be
interpreted as highly leverage companies benefit more from the Acts provisions regarding off-balance-
sheet transactions, possible conflicts of interest reduction, more control mechanisms, and more effective
corporate governance to ensure compliance with the restrictive covenants specified in debt agreements.
The coefficients for MTB and MAC are also of interest. These coefficients are positive and significant,
indicating that the market was upgrading larger firms with high growth potential because these firms were
perceived to (1) benefit more from provisions of the Act intended to control earnings management
activities; and (2) be better able and equipped to observe high compliance costs of the Act. These results
suggest that for more levered and high growth potential firms, the benefits of the Act outweigh its
compliance costs. We detect a negative relation between audit fees variable (AUT) as a proxy for the cost of
compliance with provisions of the Act and the observed capital market reactions to the Act. The
coefficients of AUT are only statistically significant for events of July 24, 25, and 26. This lends support to
our prediction that the Act was more costly for less-compliant firms than more-compliant firms.
Limitations and Suggestions for Future Research
There are a few caveats to our study. First, provisions of the Act affect all publicly traded
companies. We were neither able to classify affected firms into treatment versus control groups nor could
we use the more popular market model to test stock price reactions to the Act. Thus, we use the constant-
mean returns model to investigate the reaction of the entire market portfolio of firms in the S&P 500, and
we used the value-line indices to the events leading up to the passage of the Act. The test of the first

30
hypothesis does not rule out the possibility that events other than Congressional actions could have
produced the results. To the extent that there are confounding events or omitted variables that are also
correlated with our events or cross-sectional model, it is possible that our analyses are being driven by
these factors and not by provisions of the Act. However, searches for confounding events reveal that no
other relevant event of similar magnitude is known to have occurred around the Congressional actions.
27

Second, prior studies (e.g., Cheng et al. 2003; Patel and Dallas 2002; Khanna et al. 2003; Durnev
and Kim 2002) caution that S&P scores are not necessarily proxies for corporate governance. Our results
pertaining to the effect of the Act on firm characteristics rely on the extent to which the selected S&P
scores measure the strength of corporate governance, reliability, and transparency of financial reports.
These scores for individual firms reflect the ratio of the number of present attributes out of the total 98
informative items, and do not necessarily measure the quality of the attributes. Measures of corporate
governance and some measures of financial reporting are quantitative not qualitative, which does not allow
us to distinguish between the quantity and quality of disclosures. Finally, as with any study of the passage
of legislation, our findings should be interpreted with caution primarily because of the difficulty in
identifying (1) the timing of information about the Act to the market and (2) firm-specific effects due to the
fact that the Act affects all firms simultaneously.
6. Conclusion
The wave of financial scandals coincided with substantial drops in stock prices and public anxiety
over the economy in July 2002, which encouraged Congress to pass the Sarbanes-Oxley Act. Marketplace
mechanisms do not always provide timely, reliable, and effective self-corrections, as evidenced by reported
business and accounting scandals. Thus, regulations are expected to create an environment that promotes
strong marketplace integrity and investor trust in the quality and transparency of financial disclosures. The
Act is intended to restore eroded public confidence in financial reports by reinforcing corporate
accountability and improving the corporate governance, financial reports, and audit functions of public
companies. This study examines capital market reactions to the events leading up to the passage of the Act.
We detect significantly positive (negative) abnormal returns around the events that increased (decreased)
the probability of the passage of the Act. One interpretation of detecting positive capital market reactions to

31
the passage of the Act is that the Act provides incentives and mechanisms for both public companies and
their auditors to better signal the quality, reliability, and transparency of their financial statements as well
as the effectiveness and credibility of audit functions.
This study also sheds light on the determinants of the observed market reaction using firm-specific
variables. We find that more compliant firms with more effective corporate governance, more reliable and
transparent financial reports, and more credible audit functions prior to the Act were more positively
affected by the Act than other firms. One interpretation of this finding is that although the Act equally
benefits all firms, it imposes higher costs of compliance on firms with poor governance and lower
transparency and disclosure standards. Results suggest that the Act, by either generating what investors
considered as good news or creating an environment that promotes strong marketplace integrity has served
as a stimulus to encourage initiatives for rebuilding the public confidence in corporate governance, the
financial reporting process, and audit functions. Overall, our results suggest that the induced benefits of the
Act significantly outweigh its imposed compliance costs as measured by stock prices. This can also be
interpreted that the capital markets expected that the Act would improve corporate governance and take
their optimal level of governance in the pre-Act period to the higher level, which ultimately maximizes
shareholder value.

30
APPENDIX A
Summary of provisions of the Act relating to corporate governance, financial reporting, audit functions, and others

Corporate Governance Financial Reporting Audit Functions Others
1. Enhanced audit committee
responsibility for hiring, firing,
compensating, and overseeing
auditors and pre-approval of non-audit
services.
2. Disclosure, in the periodic reports,
whether the audit committee has at
least one member who is a financial
expert and if not, why not.
3. CEOs and CFOs certification of the
accuracy and completeness of
quarterly and annual reports.
4. Management assessment and
reporting of the effectiveness of
disclosure controls and procedures.
5. Ban on personal loans by
companies to their directors or
executives other than certain regular
consumer loans.
6. Establishment of procedures by
each audit committee for receiving,
retaining, and handling complaints
received by the company concerning
accounting, internal controls, or
auditing matters.
7. Review of each quarterly and
annual report (forms 10-Q and 10-K)
by officers.

1. CEO/CFO certification of
financial reports.
2. Internal control report by
management.
3. Attestation and report by
auditors on managements
assessment of internal controls.
4. Disclosures of off-balance-
sheet arrangements.
5. Disclosures of contractual
obligations.
6. Disclosures of reconciliation
of non-GAAP financial
measures pertaining to pro
forma financial information.
7. Disclosures of material
correcting adjustments by
auditors.
8. Disclosures of transaction
involving management and
principal stockholders.
9. Accelerated filing of changes
in beneficial ownership by
insiders.
10. Real time disclosures of
information concerning
material changes in financial
condition or operations (form
8-K disclosures).

1. Establishment and operation of the
Public Company Accounting Oversight
Board (PCAOB), an independent non-
governmental agency that regulates and
oversees the audit of public companies.
2. Registration with the PCAOB of
public accounting firms that audit
public companies.
3. PCAOB authority to issue auditing
standards, inspect registered accounting
firms operations and investigate
potential violations of Securities laws.
4. Requirement that auditors be
appointed, compensated, and overseen
by the audit committee.
5. Many non-audit services are
prohibited from being performed
contemporaneously with an audit.
6. Rotation of the lead (or coordinating)
audit partner and the lead review
partner every five years.
7. Auditors report to the audit
committee.
8. Prohibiting where CEO or CFO
previously employed by auditor.
9. Auditors attestation to and reporting
on management assessment of internal
controls.
10. Limitations on partner
compensation.

1. Professional responsibilities
for attorneys appearing and
practicing before the SEC.
2. Disclosures of corporate code
of ethics.
3. Collection and administration
of funds for victim investors.
4. Analyst conflicts of interest
(Regulation AC).
5. Whistle-blower protection.
6. Debts non-dischargeable in
bankruptcy.
7. Temporary freeze authority for
SEC.
8. SEC censure or bar any person
who is not qualified, lacks the
requisite character or integrity, or
with unethical conduct, from
appearing before the SEC.
9. Lengthened statute of
limitations for securities fraud.
10. Criminalization of corporate
misconducts.
11. Criminal penalties for
defrauding shareholders of public
companies.
12. Retaliation against
informants.



31
APPENDIX A, cont.

Corporate Governance Financial Reporting Audit Functions Others
8. Forfeiture by CEO or CFO of
certain bonuses and profits when the
company restates its financial
statements due to its material non-
compliance with any financial
reporting requirements.
9. Improper influence on conduct of
audits.
10. Insider trades during pension fund
blackout periods.
11. Officers and directors bars and
penalties for violations of Securities
laws or misconduct.
11. Periodic review of
published financial statements
by the SEC at least once every
three years.
12. SEC-enhanced authority to
determine what constitutes
U.S. GAAP.
11. Disclosure of fees paid to the
auditor.
12. Requirements for pre-approval of
audit and permitted non-audit services
by the audit committee.
13. Retention of audit work papers and
documents for five years.
14. Increased penalties for destruction
of corporate audit records.
13. Increased criminal penalties
under Securities laws and mail
and wire fraud.
14. Future studies on
consolidation of public accounts
by firm, audit firm rotation,
accounting standards, credit
rating agencies, and investment
banks.



32
APPENDIX B
1. NUMERICAL EXAMPLE with different firm complexity:

A discrete example clarifies the propositions. Suppose e = 1, v = 0.3, f = .2,
b
= 3.5,
a
= 5.5. Suppose,
there are only 2 types of firms = 0.1 for firm type M and = 0.9 for firm type L.

opt
=
|

\
|
1
2
1
v
e

f v e p
x
+ = )} ( ){ 1 (

Type 1( =0.1) :

M
opt
=
|

\
|

1
1 . 0 3 . 0
1
2
1
=16.1667

1 . 0 2 . 0 )} 1667 . 16 1 . 0 3 . 0 ( 1 ){ 1667 . 16 1 ( 5 . 5 )} ( ){ 1 ( + = + = f v e p
a
M
a

= 48.6047
1 . 0 2 . 0 )} 1667 . 16 1 . 0 3 . 0 ( 1 ){ 1667 . 16 1 ( 5 . 3 )} ( ){ 1 ( + = + = f v e p
b
M
b

= 30.9230

Type 2( =0.9) :

L
opt
=
|

\
|
1
2
1
v
e
=
|

\
|

1
9 . 0 3 . 0
1
2
1
=1.3518
1 . 0 2 . 0 )} 3518 . 1 1 . 0 3 . 0 ( 1 ){ 3518 . 1 1 ( 5 . 5 )} ( ){ 1 ( + = + = f v e p
a
L
a

= 12.3897
1 . 0 2 . 0 )} 3518 . 1 1 . 0 3 . 0 ( 1 ){ 3518 . 1 1 ( 5 . 3 )} ( ){ 1 ( + = + = f v e p
b
L
b

= 7.8771


(p
a
M
p
b
M
) (p
a
L
p
b
L
) = (48.6047 30.9230) (12.3897 7.8771) =13.1691 > 0


2. NUMERICAL EXAMPLE with different variable costs:

Note that difference in firm complexity is necessary to show (p
a
M
p
b
M
) (p
a
L
p
b
L
) > 0. If firms with
similar complexity differed in the level of compliance merely because of a difference in their cost
structures, the above inequality can be shown to hold. Consider, for example, a slightly modified situation:
Suppose e = 1, v = 0.3 for firm type J and v = 0.8 for firm type K, f = .2,
b
= 3.5,
a
= 5.5, and = 0.5 for
each firm.

J
opt
=
|

\
|

1
5 . 0 3 . 0
1
2
1
= 2.8333;
K
opt
=
|

\
|

1
5 . 0 8 . 0
1
2
1
= 0.75

33
(p
a
J
p
b
J
) (p
a
K
p
b
K
) = (12.0228 7.6145) (6.6375 4.1875) = 1.9583
3. NUMERICAL EXAMPLE with different earnings:
Another possibility is difference in earnings of the 2 firms driving their level of compliance. For example:
Suppose e = 1 for firm type X and e = 0.7 for firm type Y, v = 0.3 for both firms, f = .2,
b
= 3.5,
a
= 5.5,
and = 0.5 for each firm.

X
opt
=
|

\
|

1
5 . 0 3 . 0
1
2
1
= 2.8333;
Y
opt
=
|

\
|

1
5 . 0 3 . 0
7 . 0
2
1
= 1.8333
(p
a
X
p
b
X
) (p
a
Y
p
b
Y
) = (12.0228 7.6145) (6.5228 4. 1145) = 2 >0


34
End Notes
1. In signing the Act, President George W. Bush described it as the most far-reaching reforms of
American business practice since the time of Franklin Delano Roosevelt (Bumiller 2002). The
SEC Commissioner, Harvey Goldschmid, called the Act the most sweeping reform since the
Depression-era Securities Laws (Murray 2002).
2. See Cunningham (2003) and Ribstein (2002) for in-depth critiques of the Act, and the discussion
of market versus regulatory responses to financial scandals.
3. See Easton (1999) and Ali and Kallapur (2001) for implications of this type of research in market
event studies.
4. The chief executive officer of Deloitte and Touch in a testimony before the House Committee on
Financial Services states that, the Act is already having a significant impact and, over time, it
should help in fulfilling its intended purpose of restoring investor confidence (Quigley 2004).
Turner (2005), in a presentation to the April 2005 SEC Roundtable, states that the Act has resulted
in significant benefits to investors, the capital markets, and public companies.
5. These Acts (1933, 1934) were intended to protect investors from fraudulent or misleading
information by increasing the general extent of accounting disclosures and restricting accounting
alternatives. The PSLRA had increased restrictions on private litigants ability to sue for
investment losses from securities fraud.
6. In a related study, Bhattacharya, Groznik, and Haslem (2002) find no evidence of capital market
reactions to the CEO and CFO certification requirements imposed by the SEC on large public
companies prior to the passage of the act.
7. See Rezaee (2004) for a more in-depth discussion of provisions of the Act addressing corporate
governance, the financial reporting process, and audit functions. See Wiesen (2003) for the impact
of the Act on 20 areas of disclosure regulation.
8. The WSJI, WSJ, and NYT typically report the press release announcements of these events one
day after the event date. The announcement dates listed in Table 1 are from the SEC and

35
Congressional websites. To capture the full impacts of these events we use a three-day event
window around event dates.
9. The New York Times quoted Democratic leaders who attacked the House bill as toothless (Oppel
2002a).
10. Financial Times, on June 22, 2002, reports that A Senior White House official said yesterday
President George W. Bush does not support legislation backed by Senate Democrats that would
place stringent new regulations on the accounting industrythe White House backed reforms
unveiled on Thursday by Harvey Pitt (Adetunji, Humes-Schulz, and Spiegel 2002).
11 The New York Times reported that the Presidents rhetoric calling for a new ethic of personal
responsibility in the business community was a gaping gum, no teeth (Jennings 2002, 15).



12. Table 2 describes measures of corporate governance, financial reporting, and audit function
characteristics used in our cross-sectional analysis.
13. Prior studies (e.g., Rezaee 1990; Stice 1991; Bhattacharya et al. 2002) use the constant-mean
return model for investigating the capital market reactions around accounting standards and
legislative events. The market reaction in Table 4 is tested using the constant-mean return model
based on the following equation:

21 , 142 , = Mt
Mt Mt
R R AR

where
Mt
AR = abnormal market return on the event date,
Mt
R = actual market return on the
event date, and
21 , 142 , Mt R
= the mean market return (benchmark) during the 121 trading
days during the estimation period. Prior research (e.g., Brown and Warner 1980, 1985; Boehmer,
Musumeci and Poulsen 1991) documents that event studies are appropriate and typically work
well when an event, such as the Act, has an identical effect on all firms. Nevertheless, events with
stochastic effects may cause increases in the variance of returns, which may reduce the ability of

36
the commonly-used methods to detect abnormal returns. Schipper and Thompson (1983, 217) state
that in the case of powerful regulations (e.g., the Williams Amendments Act in their study or, the
Sarbanes-Oxley Act in our study), the same conclusions will be drawn from tests based on a
variety of econometric methods.
14. The abnormal returns (daily and cumulative) are standardized over the estimation period using the
event-induced variance method (Standardized Cross-sectional Procedures) suggested by Boehmer,
Musumeci and Poulsen (1991). We form the standardized cross-sectional test by dividing the
average event-period standardized residual by its contemporaneous cross-sectional standard error.
Mt
AR , a measure of excess returns, is assumed to be normally distributed with mean zero and
variance
2
Mt
. A standardized residual (
Mt
SAR ) is then defined as:

+ +
=
T
t
M
Mt
M
Mt
M
Mt
Mt
R R
R R
T
S
AR
SAR
1
2
2
) (
) ( 1
1

When N = number of firms in the portfolio
T = number of days in the estimation period (-142 through -21)
R
M
= average market return during the estimation period
S
M
= estimated standard deviation of abnormal returns during the estimation period.
Our test statistic is:

= =
=
|

\
|

N
i
N
i
Mt
Mt
N
i
Mt
N
SAR
SAR
N N
SAR
N
1
2
1
1
) 1 (
1
1

15. Li et al. (2004) use the same approach in estimating the average stock price reaction to their
sample of 909 firms in the S&P 1500 for the 17 events. The standard deviation used in our
analysis is based on the time-series regression estimated over 485 trading days in 2001 and 2002
across firms on a given event date.

37
16. We use the market model in testing hypothesis 2 to relate firms abnormal returns to its specific
attributes about corporate governance, financial reporting, and auditing practices. We use the
constant-mean-return model to test our first hypothesis because the portfolio under investigation is
the market portfolio itself. Nevertheless, we repeat our second test using the constant-mean-return
model in addition to the market model and obtain the same findings.
17. Appendix 2 and 3 of Patel and Dallas (2002) outline the methodology of calculating individual
ranking for each of the three dimensions based on the 98 disclosure items as of June 30, 2002.
OSIR category includes 28 attributes (e.g., description of the voting rights, review of shareholders,
description of the share classes), BMSP consists of 35 attributes (e.g., a list of board members, a
list of board committees, a list of audit committee members, related party transactions), and FTID
is composed of 35 attributes (e.g., the companys accounting policy, consistency of company
accounting with GAAP, efficiency indicators, return on assets, return on equity, related party
transactions, information about auditors). One point is awarded when information on an item is
disclosed. The results from questions in each category are first summed up and then converted into
a percentage and translated into scores from 1 to 10, with a higher score indicating greater
disclosure. For example, a percentage between 91 and 100 is assigned a ranking of 10, whereas a
percentage from 1 to 10 is given a score of 1. The T&D contains qualification rankings of the
relative quantity of financial disclosures of both annual report ranking (AR) and composite
ranking (CR, the required regulatory filings).
18. Cheng et al. (2003) document that (1) S&P rankings measure the strength of corporate
governance; and (2) these various composite rankings are positively associated with abnormal
returns and earnings response coefficient and negatively related to systematic risk (market betas).
19. First, the majority of the 98 questions included in the scoring process are based on U.S. best
practices rather than the global benchmark. Second, the scores measure the disclosure of financial
reporting attributes and corporate governance characteristics rather than assessing the quality of
the disclosure practices. Third, T&D scores are developed by assigning one point to each
disclosure item regardless of the level of importance of items to effective corporate governance

38
and reliability of financial reports. Finally, there may be some overlapping questions in the three
classified dimensions (OSIR, BMSP, FTID).
20. FTID variable is used in prior studies (Cheng et al. 2003; Patel and Dallas 2002; Khanna et al.
2003; Durnev and Kim 2002) as a proxy for financial transparency and disclosure.
21. Frankel et al. (2002) document a negative relation between non-audit fees and security prices.
Ashbaugh et al. (2003) find no evidence of auditors violating their independence due to receiving
high audit fees or having a high ratio of non-audit to total auditor fees.
22. We also calculated 2-day CARs for days -1, 0 as well as 0, +1 for the S&P index. The results of 2-
day CARs are similar to those of 3-day CARs. Thus, we only present results of 3-day CARs to
capture both the possibility of the information leakage prior to the event date and the fact that the
popular press (WSJ, NYT) reported the event typically one day after its announcement.
23. The S&P 500 market index produces the same results as the value-line index.
24. We search the WSJ and the NYT for these event dates (particularly July 9, 15, 16, and 19) to find
media reports on the likelihood of the passage of the Act, its possible contents, and any
confounding events that might have affected stock prices. The main reason for market decline
during the announcement dates of these events as reported in the WSJ was concerns regarding the
likelihood of passage of an effective Act in restoring already eroded investor confidence in the
capital market. The popular press also predicted that WorldCom would soon file for bankruptcy on
July 19, 2002, which was actually announced on July 21, 2002.
25. The standardized cross-sectional procedures suggested by Boehmer et al. (1991) is used to test the
statistical significance of abnormal returns of portfolios of firms closer to and far from compliance
with the provisions of the Act. Although the test statistics are lower than the traditional event-
study methods, they still significant for events leading up to the passage of the Act (see Table 4)
irrespective of the standardized adjustment.
26. We standardize both AR and CAR dependant variable in Table 5 over the estimation period using
the event-induced variance method suggested by Boehmer et al. (1991).

39
27. We searched the Wall Street Journal, the Wall Street Journal Index, and the New York Times to
identify any confounding events that might have affected stock prices during June and July 2002
(see Table 4). We found that the Act, the likelihood of its passage, and its possible impacts on
restoring the publics confidence and prevention of future business and accounting scandals were
dominating news during our test period.


40
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45
Figure 1: Timeline of Congressional events leading up to the passage of the Act

Date
February 14,
2002
June 25,
2002
July 9,
2002
July 19,
2002
July 24,
2002
July 30,
2003

Period Ambiguous Unfavorable Favorable
Anecdotal
Evidence
Financial Times (6/22/2002): President Bush
does not support legislation backed by
Senate Democrats.
The Republican agenda was hardly real
institutional reform at all, except timidly in
the accounting area. The Democratic agenda
more willingly tapped into the discontent, but
still faced a difficult implementation problem
(Langevoort 2002: 5).
Business and accounting lobbyists
opposing the tough measures of the Senate
bill a majority in Congress would
conclude that the Senate bill was
fundamentally flawed (Weisman 2002).
Congress could adjourn without ever
having passed any reform measure
(Geewax 2002a).
President Bush demanding a final bill
before Congress departs Washington for
the August recess (Oppel 2002b).
Associated Press (7/24/2002): The
final legislation could be on President
Bushs desk within days.
USA Today (7/25/2002): Bush, who
had backed a milder House bill, shifted
his support to a tougher Senate version.
Provisions 1. More than 30 legislative bills were
introduced.
2. Reported financial scandals were
considered to be a few rotten apples.
3. Highly controversial signals were received
from the House, the Senate, the SEC, and the
White House regarding the content, substance,
and likelihood of passage of any
Congressional reform.







1. Two distinct and controversial bills
passed in the Senate and the House.
2. Considerable uncertainty that neither the
Senate bill nor the House bill would pass.
3. Attempts were made by lobbyists to gut
the Senate bills strongest provisions.
4. Rumors that many Republicans attempt
to water down crucial provisions of the
legislation and significant doubt that any
reform bill will pass before Congress
departs Washington for the August recess.
5. Serious uncertainty regarding the content
and possibility of passage of any reform
act.
1. House and Senate negotiators agreed
on tougher legislation that received final
approval in Congress.
2. Significant pressure on Congress to
pass a compromised reform bill.
3. The Sarbanes-Oxley Act was
emerged.
4. The Sarbanes-Oxley Act is much
closer to the Senate version requiring
significant reforms in public companies
corporate governance, financial reports
and audit functions.
5. President Bush signed into law the
Sarbanes-Oxley Act of 2002.

Prediction None Negative security price reactions Positive security price reactions


46
Figure 2: Cumulative abnormal returns (CARs) from February 1, 2002 to November 19, 2002
a



a. Cumulative abnormal returns for S&P 500 in calendar time. These are not the 3-day cumulative return, for instance, cumulative return for February 28 is the
sum of abnormal returns from February 1 to February 28.
CAR
-0.3
-0.25
-0.2
-0.15
-0.1
-0.05
0
0.05
0.1
F
e
b
-
1
3
-
0
2
F
e
b
-
1
9
-
0
2
F
e
b
-
2
2
-
0
2
F
e
b
-
2
7
-
0
2
M
a
r
-
0
4
-
0
2
M
a
r
-
0
7
-
0
2
M
a
r
-
1
2
-
0
2
M
a
r
-
1
5
-
0
2
M
a
r
-
2
0
-
0
2
M
a
r
-
2
5
-
0
2
M
a
r
-
2
8
-
0
2
A
p
r
-
0
3
-
0
2
A
p
r
-
0
8
-
0
2
A
p
r
-
1
1
-
0
2
A
p
r
-
1
6
-
0
2
A
p
r
-
1
9
-
0
2
A
p
r
-
2
4
-
0
2
A
p
r
-
2
9
-
0
2
M
a
y
-
0
2
-
0
2
M
a
y
-
0
7
-
0
2
M
a
y
-
1
0
-
0
2
M
a
y
-
1
5
-
0
2
M
a
y
-
2
0
-
0
2
M
a
y
-
2
3
-
0
2
M
a
y
-
2
9
-
0
2
J
u
n
-
0
3
-
0
2
J
u
n
-
0
6
-
0
2
J
u
n
-
1
1
-
0
2
J
u
n
-
1
4
-
0
2
J
u
n
-
1
9
-
0
2
J
u
n
-
2
4
-
0
2
J
u
n
-
2
7
-
0
2
J
u
l
-
0
2
-
0
2
J
u
l
-
0
8
-
0
2
J
u
l
-
1
1
-
0
2
J
u
l
-
1
6
-
0
2
J
u
l
-
1
9
-
0
2
J
u
l
-
2
4
-
0
2
J
u
l
-
2
9
-
0
2
A
u
g
-
0
1
-
0
2
A
u
g
-
0
6
-
0
2
A
u
g
-
0
9
-
0
2
A
u
g
-
1
4
-
0
2
A
u
g
-
1
9
-
0
2
A
u
g
-
2
2
-
0
2
A
u
g
-
2
7
-
0
2
Calendar Dates
C
A
R
s
Decreasing
Events
Ambiguous Events
Increasing
Events
Unfavorable
Events

Favorable
Events

47
TABLE 1
Chronological events leading to the passage of the Sarbanes-Oxley Act of 2002

EVENT
#
DATE EVENT DESCRIPTION EVENT CLASSIFICATION
1 February 14,
2002
Introduction of H.R.
3763
The House of Representatives (Oxley, the Committee on Financial Services)
introduced H.R. 3763 to protect investors by improving the accuracy and reliability
of corporate disclosures.
Ambiguous
2 June 18, 2002 Senate Panel The Senate Banking Committee approves (17-4) a bill to tighten regulation of the
accounting profession, corporate executives, and financial analysts.
Ambiguous
3 June 20, 2002 SEC Proposal The SEC proposed the creation of a nine-member Public Accountability Board to
oversee the accounting profession
Ambiguous
4 June 25, 2002 Introduction of S. 2673 Senator Sarbanes introduced S.2673 to (1) improve the quality and transparency in
financial reporting; (2) designate an independent Public Accounting Board; (3)
enhance the standard setting process for accounting practices; and (4) improve
SEC resources and oversight.
Ambiguous
5 July 9, 2002 Presidents Wall Street
Speech
President Bush made a proposal for Securities Law Reform calling for new ethic of
personal responsibility in the business community.
Unfavorable
6 July 15, 2002 Senate Bill The Senate passed S. 2673. Unfavorable
7 July 16, 2002 House Bill The House passed H.R. 3763. Unfavorable
8 July 19, 2002 Conference Committee
Meeting
There were some uncertainties regarding the form, content, and the possibility of
passage of the Act.
Unfavorable
9 July 24, 2002 Conference Report The Congressional Conference Committee reached an agreement on
comprehensive reform legislation (the Sarbanes-Oxley Act of 2002).
Favorable
10 July 25, 2002 Congressional
Legislation
Congress passed the Sarbanes-Oxley Act of 2002 by a vote of 423-3 in the House
and 99-0 in Senate.
Favorable
11 July 26, 2002 Compromised Bill Sent
to the President
Congress sent a compromised bill to the President to sign into law. Favorable
12 July 30, 2002 Sarbanes-Oxley Act of
2002
President Bush signed into law the Sarbanes-Oxley Act of 2002. Favorable

48
TABLE 2
Definitions of variables used in the cross-sectional analysis and data sources

Variables Definition Data Source
I. Dependent Variables:
AR Daily abnormal returns (AR) calculated for events 9, 10, 11 and 12. Equation 1: www.finance.yahoo.com
CAR Three-day cumulative abnormal returns (CAR) calculated for events 9, 10, 11 and 12. Equation 2: www.finance.yahoo.com
II. Test Variables:
A. Corporate Governance:
1. OSIR
S&Ps composite scores for ownership structure and investor rights as of June 30, 2002.
2. BMSP
S&Ps composite scores for board and management structure and process as of June 30, 2002.
S&P Transparency and
Disclosure Survey available at
www.standardandpoors.com
B. Financial Reporting:
1. FTID
S&Ps composite scores for financial transparency and information disclosure as of June 30, 2002.
S&P Transparency and
Disclosure Survey
2. ATAC
The absolute value of total accruals, equal to net income minus cash flows from operations, deflated by average
total assets for the fiscal year ended December 2001.
COMPUSTAT
C. Audit Functions:
1. NATA
The ratio of non-audit fees to total auditor fees for the fiscal year ended December 2001. SEC Proxy Statements
2. AA
An indicator variable that is set to 1 if firms financial statements for fiscal year ending December 2001 are
audited by Arthur Andersen, and 0 otherwise.
SEC Proxy Statements
III. Control Variables
1. MAC
Market capitalization of the firm calculated as the market value of the equity at the end of June 2002. COMPUSTAT
2. MTB
Market-to-book ratio of common equity at the end of June 2002. COMPUSTAT
3. LEV
Debt-to-equity ratio calculated for the year ended December 2001. COMPUSTAT
4. AUT
Audit fees for the fiscal year ending December 2002 Audit Analytics

49
TABLE 3
Descriptive statistics of and correlations between firm characteristics (N=415)

Variable: OSIR BMSP FTID ATAC NATA AA MAC
b
MTB
c
DTE AUT
d

Panel A: Descriptive Statistics of Firm Characteristics
a

Mean 5.6578 8.1950 8.1460 0.0868 0.5241 0.1606 0.0179 0.0369 0.5734 3.7150
Median 6.0000 8.0000 8.0000 0.0585 0.5344 0.0000 0.0079 0.0265 0.4538 2.0371
Minimum 4.0000 6.0000 6.0000 0.0000 0.0215 0.0000 0.0005 -1.5796 0.0000 .13500
Maximum 9.0000 9.0000 10.0000 2.1287 1.0000 1.0000 0.2963 1.4176 5.1439 38.7000
Std. Dev. 0.8993 0.5349 0.6580 0.1516 0.2083 0.3672 0.0358 0.1249 0.6490 4.8564
Panel B: Pearson Correlation Between Firm Characteristics
OSIR 1.0000 0.0788
e
0.0617
f
0.0467
e
-0.0832
e
0.1089
e
-0.1770
e
0.0576
e
0.0264 0.0705
f

BMSP 1.0000 0.1583
f
-0.0816
e
-0.0845
e
0.0251 -0.0149 -0.0305 0.1223
e
0.1570
f

FTID 1.0000 -0.0877
f
-0.0933
e
-0.0386 0.0596
f
0.0023 0.0885
e
0.1407
f

ATAC 1.0000 0.0724
f
-0.0207 -0.0545
f
-0.0010 -0.1609
e
0.1018
f

NATA 1.0000 -0.3038
e
0.0928
e
0.0693
f
0.0436 0.0090
AA 1.0000 -0.0884
e
0.0286 -0.0294 0.0464
e

MAC 1.0000 0.0507
f
0.0725
f
0.5868
f

MTB 1.0000 0.0317 0.0279
DTE 1.0000 0.1609
f

AUT
d
1.0000

a. Variables are abbreviated according to Table 2.
b. Market Capitalization (MAC) variable is in trillions of dollars.
c. Market-to-book ratio of common equity (MTB) is scaled by 100.
d. Audit fee (AUT) is in millions of dollars.
e. Correlation is significant at the 0.01 level (2-tailed).
f. Correlation is significant at the 0.05 level (2-tailed).



50
TABLE 4
Market reaction to the events leading up to the passage of the Sarbanes-Oxley Act of 2002:

PANEL A: Abnormal Returns by Event


21 142 ,
=
mt mt mt
R R AR

=
+ + =
12
1 j
j j j o t
e D a R

Value-line Index
b
Portfolio of Stocks
Event
Number

Event
Date
Prediction
a

Event Day
Abnormal
Return (AR)
3-day CAR
c

Average Daily
d

Incremental
Return
3-Day CAR
c

Intercept - -
-0.06% -0.04%
1 Feb 14-02 U -0.76% -0.39% -0.12% -0.05%
2 Jun 18-02 U -0.17% 0.81% 0.19% 1.1%
3 Jun 20-02 U -1.14% -3.52%** -1.29% -1.89%*
4 Jun 25-02 U -1.66% -2.30% -1.60% -0.48%

5 Jul 09-02 D -1.70% -5.83%** -2.41%* -2.32%**
6 Jul 15-02 D -0.85% -2.27% -0.32% -1.03%
7 Jul 16-02 D -0.88% -1.34% -1.78% 0.18%
8 Jul 19-02 D -3.11%* -8.19%** -3.78%** -3.23%**

9 Jul 24-02 I 4.34%** -0.20% 5.79%** -1.35%
10 Jul 25-02 I -0.80% 4.21%** -0.51% 3.61%**
11 Jul 26-02 I 0.67% 5.34%** 1.75% -0.57%
12 Jul 30-02 I 0.28% 4.63%** 0.48% 2.5%**

51
PANEL B: Abnormal Returns Across Events Categories and Across All Events

Event Categories Time Period Average Daily
e

Abnormal Returns
(Value-Line Index)
Average Daily
e

Abnormal Returns
(Portfolio of Stocks)
Ambiguous (Events 1-4) Feb 14/02 June 25/02 -0.07% -0.10%
Unfavorable (Events 5-8) July 09/02 July 19/02 -1.33%** -1.51%**
Favorable (Events 9-12) July 24/02 July 30/02 1.20%** 3.11%**
All Events (1-12) Feb 14/02 July 30/02 -0.15% -0.14%

Note: ** and * indicate statistical significance at the 1% and 5% levels, respectively.

a. Predictions: Increase (I), decrease (D), or uncertainty (U) in the likelihood of the passage of the Sarbanes-
Oxley Act of 2002.
b. Abnormal returns are calculated using the return on the Value-Line equally weighted index in a constant-
mean return model. The calculated abnormal returns using the return on S&P 500 value weighted index
provide similar results.
c. Cumulative abnormal returns (CARs) are sum of ARs on days -1, 0, and +1. Results for 2-day CARs for
days (-1, 0) and (0, +1) are not statistically different from those of 3-day CARs.
d. Average daily incremental return for each event estimated over 485 trading days of stock return data for
2001 and 2002.
e. Average daily abnormal return for each event for the time period specified in Time Period column.


52
TABLE 5
Cross-sectional analysis of abnormal returns surrounding the key events leading to the passage of the Sarbanes-Oxley Act of 2002
a


it it it it it it it it it it it it
AUT LEV MTB MAC AA NATA ATAC FTID BMSP OSIR CAR + + + + + + + + + + + =
10 9 8 7 6 5 4 3 2 1



July 24, 2002 July 25, 2002 July 26, 2002 July 30, 2002 All Favorable Events

AR CAR AR CAR AR CAR AR CAR AR CAR

Coefficient
(Std. Error)
Coefficient
(Std. Error)
Coefficient
(Std. Error)
Coefficient
(Std. Error)
Coefficient
(Std. Error)
Coefficient
(Std. Error)
Coefficient
(Std. Error)
Coefficient
(Std. Error)
Coefficient
(Std. Error)
Coefficient
(Std. Error)
Intercept
- -- -0.1602** 0.1602** 0.1602** 0.1602**
(0.0519)
- -- -0.2592* 0.2592* 0.2592* 0.2592** ** *
(0.0985)
- -- -0.1243 0.1243 0.1243 0.1243** ** ** **
(0.0468)
- -- -0.4149 0.4149 0.4149 0.4149** ** ** **
(0.1190)
0.0204
(0.0318)
- -- -0.1619 0.1619 0.1619 0.1619* ** *
(0.0683)
-0.0275
(0.0358)
- -- -0.1426 0.1426 0.1426 0.1426* ** *
(0.0658)
- -- -0.0729 0.0729 0.0729 0.0729** ** ** **
(0.0219)
- -- -0.2447 0.2447 0.2447 0.2447** ** ** **
(0.0470)
OSIR
-0.0015
(0.0029)
0.0012
(0.0041)
0.0042
(0.0022)
0.0019
(0.0049)
-0.0042
(0.0020)
0.0001
(0.0036)
-0.0026
(0.0031)
-0.0041
(0.0049)
-0.0010
(0.0013)
-0.0002
(0.0023)
BMSP
0.0087
(0.0055)
0.0212* 0.0212* 0.0212* 0.0212** ** *
(0.0082)
0.0073 0.0073 0.0073 0.0073* ** *
(0.0040)
0.0282 0.0282 0.0282 0.0282** ** ** **
(0.0101)
0.0009
(0.0038)
0.0131 0.0131 0.0131 0.0131* ** *
(0.0067)
-0.0017
(0.0035)
0.0021
(0.0058)
0.0038 0.0038 0.0038 0.0038* ** *
(0.0022)
0.0161 0.0161 0.0161 0.0161** ** ** **
(0.0041)
FTID
0.0133** 0.0133** 0.0133** 0.0133**
(0.0047)
0.0137* 0.0137* 0.0137* 0.0137*
(0.0077)
0.0074 0.0074 0.0074 0.0074** ** ** **
(0.0035)
0.0219 0.0219 0.0219 0.0219** ** ** **
(0.0091)
0.0009
(0.0029)
0.0114 0.0114 0.0114 0.0114* ** *
(0.0054)
0.0058
(0.0038)
0.0188 0.0188 0.0188 0.0188** ** ** **
(0.0069)
0.0068 0.0068 0.0068 0.0068** ** ** **
(0.0019)
0.0164 0.0164 0.0164 0.0164** ** ** **
(0.0038)
ATAC
- -- -0.0672** 0.0672** 0.0672** 0.0672**
(0.0215)
- -- -0.1531** 0.1531** 0.1531** 0.1531**
(0.0235)
- -- -0.0673 0.0673 0.0673 0.0673** ** ** **
(0.0096)
- -- -0.2083 0.2083 0.2083 0.2083** ** ** **
(0.0381)
- -- -0.0482 0.0482 0.0482 0.0482** ** ** **
(0.0174)
- -- -0.1863 0.1863 0.1863 0.1863** ** ** **
(0.0371)
0.0330
(0.0286)
-0.0587
(0.0424)
- -- -0.0374 0.0374 0.0374 0.0374** ** ** **
(0.0158)
- -- -0.15 0.15 0.15 0.1516 16 16 16** ** ** **
(0.0272)
NATA
-0.0149
(0.0130)
- -- -0.0404* 0.0404* 0.0404* 0.0404*
(0.0206)
- -- -0.0372 0.0372 0.0372 0.0372** ** ** **
(0.0098)
- -- -0.0620 0.0620 0.0620 0.0620** ** ** **
(0.0251)
- -- -0.0158 0.0158 0.0158 0.0158* ** *
(0.0082)
- -- -0.0515 0.0515 0.0515 0.0515** ** ** **
(0.0178)
0.0127
(0.0102)
0.0126
(0.0185)
- -- -0.0138 0.0138 0.0138 0.0138** ** ** **
(0.0053)
- -- -0.0353 0.0353 0.0353 0.0353** ** ** **
(0.0106)
AA
0.0127
(0.0067)
0.0009
(0.0126)
-0.0036
(0.0076)
0.0066
(0.0150)
-0.0043
(0.0040)
0.0020
(0.0106)
0.0074
(0.0061)
0.0162
(0.0081)
0.0030
(0.0032)
0.0064
(0.0060)
MAC
0.1015
(0.0671)
0.2083
(0.1464)
0.0239
(0.0594)
0.2542
(0.1820)
0.1895 0.1895 0.1895 0.1895** ** ** **
(0.0368)
0.1551
(0.0958)
-0.0897
(0.0583)
-0.0209
(0.0902)
0.0563 0.0563 0.0563 0.0563* ** *
(0.0316)
0.1492 0.1492 0.1492 0.1492* ** *
(0.0688)
MTB
0.0105
(0.0114)
0.0464
(0.0282)
0.0152
(0.0099)
0.0569
(0.0319)
0.0034
(0.0069)
0.0228
(0.0153)
-0.0082
(0.0089)
0.0067
(0.0177)
0.0053
(0.0046)
0.0332 0.0332 0.0332 0.0332** ** ** **
(0.0099)
LEV
0.0039
(0.0043)
0.0072
(0.0053)
0.0088 0.0088 0.0088 0.0088* ** *
(0.0030)
0.0107
(0.0076)
0.0024
(0.0019)
0.0129 0.0129 0.0129 0.0129* ** *
(0.0061)
-0.0007
(0.0018)
0.0058
(0.0055)
0.0036 0.0036 0.0036 0.0036** ** ** **
(0.0014)
0.0091 0.0091 0.0091 0.0091** ** ** **
(0.0033)
AUT
-0.0005
(0.0005)
- -- -0.0019 0.0019 0.0019 0.0019* ** *
(0.0009)
-0.0002
(0.0004)
- -- -0.0024 0.0024 0.0024 0.0024* ** *
(0.0011)
- -- -0.0009 0.0009 0.0009 0.0009** ** ** **
(0.0003)
-0.0004
(0.0007)
0.0007
(0.0006)
0.0013
(0.0009)
-0.0002
(0.0003)
-0.0009
(0.0005)
Number
of Obser-
vations
415 415 415 415 1660
Adjusted
R-square
8.47% 11.86% 13.49% 15.58% 9.05% 21.74% .94% 4.48% 4.32% 12.17%


Notes: ** and * indicate statistical significance at 1% and 5% levels respectively

a. This Table estimates two regressions with daily abnormal returns (AR) and cumulative abnormal returns (CAR) respectively. The equation for CAR is shown above and
AR equation is similar