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This study examines the impact of SEC enforcement actions on the turnovers of culpable CEOs and CFOs named in the enforcement actions, following their violations of the SOX provisions. We compare the impact on CEO turnover with that on CFO turnover. The impact in the pre-SOX period and that in the post-SOX period are also compared. Findings of this study provide evidence that the SEC enforcement actions are associated with the probabilities of turnovers of CEOs and CFOs named in the SEC enforcement actions for violations of SOX 303 and SOX 305. Specifically, CEOs sanctioned by the SEC are likely to lose their positions when they violate SOX 305. In contrast, CFOs sanctioned by the SEC for violating SOX 303 are likely to be forced to resign. When CFOs are named as mastermind by the SEC, they are likely to lose jobs. However, when both CEO and CFO are named as masterminds in fraudulent financial reporting, CFOs are less likely to be removed. In addition, CEOs and CFOs are likely to lose their jobs when firms face bankruptcy and restate earnings and when they face criminal charges, especially in the post-SOX period.

This study examines whether firms that primarily use stock of their companies to pay for acquisitions manipulate real activities in the year preceding the merger announcement to inflate earnings. Using post-SOX data of mergers and acquisitions completed between 2003 and 2013, the findings of this study show that acquiring firms in stock-for-stock mergers inflate earnings by cutting discretionary expenses, manipulating sales to increase revenue, and overproducing goods to reduce the cost of goods sold.

In this paper, we examine the impact of preparer-side XBRL filing decisions on the accuracy and speed of financial disclosures. Specifically, we use the choice between in-house and outsourced preparation of XBRL filings to examine the impact of the decisions on financial disclosures. Using annual and quarterly SEC filings in XBRL format, we test the accuracy and speed of the filings by comparing the number of amendments and reporting delays of the filings that are prepared in-house relative to those prepared by a third party. Our results indicate that outsourcing XBRL filings increases reporting accuracy but does not affect speed. Additionally, several firm-specific characteristics, including the complexity of XBRL filings, have an impact on the accuracy and speed of XBRL filings.

Purpose This study aims to examine the reputation effect by assessing whether fraudulent financial reporting is associated with high board turnover and significant loss of directorship held by directors affiliated with fraud firms. Although the Sarbanes–Oxley Act (SOX) and major stock exchanges enhance board independence and formalize committee requirements, the new rules also create a high demand for qualified directors in the director labor market. Thus, this study further examines the change in the reputation effect of directors at fraud firms after SOX. Design/methodology/approach This paper intends to answer two research questions: Do directors suffer significant loss of reputation when firms are caught in fraudulent financial reporting schemes? Is the loss of reputation of directors at fraud firms affected by the regulation of SOX? To examine the reputation effect, this paper investigates the differences in director turnover and loss of directorships between fraud and non-fraud firms. To examine the regulation effect, this paper investigates the differences in director turnover and loss of directorships of directors at fraud firms by comparing non-fraud firms’ director turnover and directorship loss between the pre-SOX and post-SOX periods. Findings Consistent with the reputation effect, this paper found that director turnover at fraud firms is significantly higher than that at non-fraud firms. It also found that the loss of directorships of directors at fraud firms is not significantly higher, which is consistent with findings of some prior research. The paper also investigates whether this reputation effect has changed after SOX but found no significant difference in the reputation effect at fraud firms. In conjunction with prior research that finds an increased demand for qualified directors in the labor market after SOX, the results imply that this shortage of qualified directors does not help fraud firms discipline directors after SOX. Research limitations/implications The findings are limited by the sample selection of only the initial litigation of US firms which are charged of fraudulent financial reporting. The findings suggest that SOX creates an increased demand for qualified directors, and consequently results in a shortage of qualified directors in the post-SOX labor market. The shortage of qualified directors slows the director turnover and weakens firms’ ability to replace culpable directors. Future research is needed on how governance practices might contribute to the lack of turnover among board members and how to promote ongoing overhauls of boards. Practical implications The decision process for removing a director is complicated and lacks transparency. Shareholders often do not know the real reason for a director’s departure from the board. To increase the accountability of individual directors and information transparency, new rules are needed for the disclosure of evaluations of individual directors’ governance effectiveness. Originality/value Survey of previous studies (Helland, 2006; Srinivasan, 2005; Fich and Shivdasani, 2007) indicates mixed evidence on reputation effect and no evidence so far on the SOX regulation effect. This study fills the gap by extending the findings of prior research to investigate the reputation effect along with the regulation effect of SOX at fraud firms. Different from findings of some previous studies (Helland, 2006; Fich and Shivdasani, 2007), this paper provides evidence consistent with the reputation effect. It also provides new evidence on the unintended consequences of SOX on director turnover.

Based on agency theory, if equity compensation aligns audit committee members' interests with those of shareholders, the audit committee will provide effective oversight and demand more thorough audit coverage and scope. This will result in higher audit fees paid to the external auditor. This study specifically examines the associations between the types of equity compensation of audit committee members and audit fees. Our findings show differential impacts of equity compensation of audit committee in the forms of option grants and stock awards on audit fees. Specifically, equity compensation using stock awards is more effective than using option grants in aligning the interests of audit committee members with the interests of shareholders to provide better oversight of financial reporting.

Firms are pressured to meet or beat analysts’ expectations (MBE) to avoid being penalized by the market. Some firms sporadically MBE while other firms are able to consistently, or habitually, MBE. This study is an exploratory attempt to investigate how habitual MBE firms are different from firms that sporadically MBE, and whether regulation FD and the Sarbanes–Oxley Act have affected firms’ ability to habitually MBE in the post regulation periods. We find that habitual MBE firms are different than sporadic MBE firms, and that they use strategies less to MBE than sporadic MBE firms. Furthermore, it has become more difficult for firms to habitually MBE in the post-regulation periods.

PurposeThe Sarbanes‐Oxley Act (SOX) mandated a variety of corporate governance mechanisms to improve the transparency of financial reporting quality. This paper's aim is to investigate whether SOX's recently mandated disclosure of corporate governance structures affects the market's perception of earnings informativeness and firms' earnings management.Design/methodology/approachSince the first compliant disclosure of the Act would be found in firms' 2002‐2003 financial reports, the authors retrieve the post‐SOX data (pre‐SOX data) from the 2002 to 2003 (2001‐2002) period. Further, the study adopts Anderson et al.'s model to test the relations between earnings informativeness, audit committee independence, and other corporate governance variables. A similar mode is used by Chang and Sun in their study of cross‐listed foreign firms. To measure the discretionary accruals, the authors adopt Kothari et al.'s model and use the two‐digit SIC code in the cross‐sectional regression.FindingsIt is found that the market valuation of earnings surprises is significantly higher for firms which disclose stronger corporate governance functions. It is also found that the effectiveness of corporate governance in monitoring earnings management is improved after the mandated disclosure.Originality/valueThe empirical evidence shows that the quality of accounting earnings is increased after the SOX's mandated disclosure, which strengthens the link between financial reporting and corporate governance functions.

This study investigates how the stock market reacts to the publications of the Wall Street Journal's “Inside Track” columns in two distinct time periods, 1988 to 1993 and 2002 to 2004. It first examines the stock return behavior during the trading period, the filing period, and the publication day for firms appeared in the Inside Track columns in the period of 1988 to 1993 and then provides a validity test with a sample from 2002 to 2004. The evidence indicates that the market tends to under-react to the insider trading information and insiders tend to be information-motivated traders. The significant filing period returns along with significant publication period returns are consistent with the gradual price adjustment argument. The study also finds that market reactions to the publications are significantly related to insider trading when the trades involve the board chairman.

The passage of the Sarbanes–Oxley Act (SOX) marks the beginning of the mandatory disclosure of audit-committee composition and other corporate governance information for cross-listed foreign firms. We posit that the provisions of SOX improve the effectiveness of an independent audit committee and other corporate-governance functions in monitoring the earnings quality of cross-listed foreign firms, and we use cross-listed firms' earnings informativeness and earnings management to measure earnings quality. Our findings show earnings informativeness is significantly associated with audit-committee independence as well as with board independence in the post-SOX period. In contrast, we do not find a significant association between earnings informativeness and audit-committee independence in the pre-SOX period. Our findings also show a consistently negative association between earnings management and audit-committee independence after SOX, an association that is not found in the pre-SOX period. Similarly, a negative association between earnings informativeness and the CEO duality as the chair of the board is only found in the post-SOX period. Furthermore, our results show a positive (negative) association between earnings informativeness (earnings management) and an aggregate corporate-governance score as a measure of overall corporate-governance functions in both the pre- and post-SOX periods. Our findings on the change of magnitude in the relationship between earnings informativeness (earnings management) and corporate governance suggest that the SOX provisions improve the effectiveness of cross-listed foreign firms' corporate-governance functions in monitoring the quality of accounting earnings.

We examine the relationship between information content of earnings and the disclosure of audit committee independence under the Sarbanes-Oxley Act (SOX) and the Securities Exchange Commission (SEC) rulings. Specifically, we are interested in the difference in information content of earnings measured by earnings response coefficients between non-U.S. and U.S. firms in 2002 due to the fact that non-U.S. firms were not required to comply with the audit committee independence requirements while most U.S. firms were already in compliance with the rulings. Using 82 non-U.S. firms and 82 matched U.S. firms from the New York Stock Exchange (NYSE), we find evidence that the U.S. firms have higher information content of earnings than the non-U.S firms in 2002. The information content of earnings is found to be positively related to board and audit committee independence. For non-U.S. firms, we also find that early compliance with audit committee independence requirements is favorably recognized by the market. Our findings provide evidence that disclosures of fully independent audit committee and other corporate governance information under the SOX regulations as well as the SEC rulings actually improve information content of earnings.

Using methodologies developed by Barber and Lyon (1996 and 1997), we examine the long-run operating performance and stock returns of firms around in-the-money calls of convertible preferred stock. Our study intends to be a direct test of the hypothesis that managers call in-the-money convertibles when they view a decline in the firms’ performance. We find no evidence that calling firms underperform non-calling benchmark firms. On the contrary, we find mild evidence that the post-call operating performance of calling firms is better than a carefully selected group of benchmark firms and call firms’ post-call stock returns are no worse than benchmark firms.

Recent scandals at Enron, WorldCom and Global Crossing have put the ethical spotlight on corporate malfeasance as never before. However, these are the situations in which management knew that they made the wrong choice. As professor Joseph Badaracco of Harvard Business School points out, the real ethical dilemmas arise when people must choose between right and right — where both choices can be justified, yet one must be chosen over the other. Whether or not to reprice stock options represents one such ethical dilemma. Repricing can help exodus of talented employees and motivate them to improve firm performance. However, it alienates shareholders and other workers of the company who are left unprotected from the adverse economic consequences of a stock price decline. In this paper we examine the ethics and the economics of stock option repricing. We find that repricing runs counter to two key tenets of business ethics — distributive justice and ordinary decency. To examine the economics of repricing, we draw upon agency theory to identify situations where repricing has the potential to benefit shareholders. However, a survey of empirical research reveals that these benefits do not translate into reality. Repricing does not improve employee retention or firm performance. In addition, managers benefit by opportunistically timing the repricing. Due to weaknesses in corporate governance such as lack of independence and conflicts of interest, the current repricing practice seems to be at odds with the objective of shareholder wealth maximization, and at a more fundamental level, a violation of board's fiduciary duty to shareholders. We offer suggestions that mitigate the ethically undesirable effects of repricing in the wider context of prevailing corporate governance and regulatory environment. We believe that these suggestions, if properly implemented, can transform repricing from a greed-inspired evil to a valuable compensation tool to retain employees, boost their morale, and enhance stockholder wealth.

This study examines how political risk events affect the value of foreign investing firms. A unique event, the Tiananmen Square Incident, is selected to examine this issue because we believe this incident exacerbated the political risk of doing business in China. We examine the impact of the incident on the stock returns of U.S. firms with joint ventures in China. The results show that this incident indeed had a significant impact on U.S. firms with joint ventures in China, and the market had reacted to this event in an efficient manner. The results also indicate that the impact of this incident on U.S. firms was relatively small in magnitude. Further, the sharp increase of joint ventures after the incident and the significant results in high-risk group vs. the insignificant results in low-risk group provide evidence suggesting that the effect of this incident was temporary rather than long-term and regional rather than national.

We examine long-run stock returns and operating performance around firms’ offerings of common stock, convertible debt, and straight debt from 1985 to 1990. We find that pre-issue abnormal returns are positive and significant for stock issuers, but not for convertible and straight debt issuers. The post-issue mean returns show that common stock and convertible debt issuers experience underperformance during the post-issue periods, but straight debt issuers do not. Consistent with these results, common stock issuers experience the best pre-issue operating performance among all three types of issuers, and operating performance declines during the post-issue periods for common stock and convertible debt issuers. Using a new approach in linear model estimations to correct heteroskedasticity and to adjust for finite sample, we find a positive relation between post-issue operating performance and issue-period stock price reactions. The results suggest that future operating performance is anticipated at the issue and that securities issues provide information on issuers’ future performance.

Finance ethics have drawn increasing attention from both government regulators and academic researchers. This paper addresses the issue of insider trading ethics. Previous studies on insider trading ethics have failed to provide convincing arguments and consistent results. In particular, the arguments against insider trading are based primarily on moral and philosophical grounds and lack empirical rigor. This study intends to establish and examine the relationship between the ethical issue and economic issue of insider trading. We argue that the ethics of insider trading is in essence an economic rather than a moral issue. It is so far not clear to what extent insider trading may increase or decrease shareholders wealth. Until then, we must take care to avoid over-regulating insider trading.

Due to the Sarbanes-Oxley Act (SOX), new rules that require independent directors on corporate boards and committees are likely to create overlapping board structures (when a director serves on more than one committee). The purpose of this study is to examine the effects of independent and overlapping board structures on CEO compensation, CEO pay-performance sensitivity, and accrual management. Our results support Laux and Laux (2009) that overlapping compensation committees take conservative actions by granting CEOs less equity-based compensation to reduce the monitoring cost of financial reporting. However, contrary to Laux and Laux (2009), we do not find that overlapping compensation committees have any effect on CEO pay-performance sensitivity. Furthermore, our results show that SOX might reduce risk taking because independent compensation committees grant CEOs more cash-based and less equity-based compensation after SOX. In addition, although SOX improves the audit committee’s oversight functions, our findings support Laux and Laux (2009) that overlapping audit committees have an association with accruals management.

The findings of this study indicate that although the overall announcement effect of equity offerings is negative on the issuing firms' common stock prices, 23 percent of the sample firms have a positive two-day announcement period stock abnormal return (CAR). Further tests show that firms in the positive CAR group have significantly higher research and development (R&D) and profitability than firms in the negative CAR group, while the average leverage ratio of firms in the positive CAR group are significantly lower. Results of the regression analysis suggest a positive relation between the price effect and R&D as well as the profitability ratio. It also is found that only in the sample of large R&D firms is the magnitude of R&D significantly associated with the magnitude of announcement effect.

This research examines the trading behavior and motives of corporate insiders around announcements of firms' stock splits. Our empirical analyses document significant increases in insider sales prior to the announcement. Further, pre-announcement insider sales are found to be positively related to pre-announcement-period abnormal returns. These findings suggest that insider trading before stock split announcements is motivated mainly by portfolio diversification needs rather than by the information content of the announcements.

The Sarbanes-Oxley Act (SOX) mandated a variety of corporate governance mechanisms to improve the transparency of financial reporting quality. We investigate whether SOX’s recently mandated disclosure of corporate governance structures affects the market’s perception of earnings informativeness and firms’ earnings management. We find that the market valuation of earnings surprises is significantly higher for firms disclosing stronger corporate governance functions. We also find that the effectiveness of corporate governance in monitoring earnings management is improved after the mandated disclosure. Specifically, the empirical evidence shows that the informativeness of accounting earnings increases after the SOX’s mandated disclosure which strengthens the link between financial reporting and corporate governance functions.

Accounting education is facing a crisis of shortage of accounting faculty. This study discusses the reasons behind the shortage and offers suggestions to increase the supply of accounting faculty. Our suggestions are as followings. First, educators should begin promoting accounting academia as one of the career choices to undergraduate and graduate students. Second, schools should provide adequate financial support to Ph.D. students. Third, academic administers should encourage faculty’s involvement in mentoring Ph.D. students. Finally, the tenure and promotion system needs to be reevaluated to facilitate success in faculty development.

Corrigendum to “Crossed-listed Foreign Firms' Earnings Informativeness, Earnings Management and Disclosures of Corporate Governance Information under SOX” [International Journal ofAccounting.Volume (44) 1-32] Jui Chin Chang , Heuy Lian Sun b,⁎ a Department of Accounting, School of Business, Howard University, 2400 Sixth Street, NW, Washington, DC 20059, United States b Department of Accounting & Finance, School of Business and Management, Morgan State University, 1700 E. Cold Spring Lane, Baltimore, MD 21251, United States

Announcing a layoff decision could trigger either an increase or decrease in firm value, depending upon whether adverse market conditions or efficiency improvement are motivating it. Layoff announcements often contain information that indicates the motivation. This article finds that the layoff announcement is a useful signal for investors. There are significantly positive (negative) abnormal stock returns around the announcement date for firms that cite efficiency improvements (demand declines) as the reason for the layoffs.