SECTION 404 OF SARBANES-OXLEY ACT: DID THE STOCK MARKET ANTICIPATE IT?

Abstract

With the passage of the Sarbanes-Oxley Act [SOX], substantial new internal control disclosures are required of publicly traded companies. This paper examines the relationship between internal control and SOX and analyzes evidence found in the timing of stock market price adjustments that appears to support the semi-strong efficient market hypothesis relative to internal control disclosures. Our conclusion is that stock price behavior for companies with material weaknesses in internal control reflects the additional risk associated with the weakness and this reflection occurs before the SOX mandated public disclosure of the weakness.