INVESTOR CONFIDENCE AND THE CEO/CFO CERTIFICATION REQUIREMENT OF SARBANES-OXLEY

Abstract

As the high incidence of corporate malfeasance began to erode investor confidence in the financial reporting systems and financial markets, Congress passed the Sarbanes-Oxley Act. Sarbanes-Oxley holds the CEO and CFO of publicly traded companies accountable to investors by requiring them to certify that the financial statements are free of material misstatements1. While an often cited purpose of this certification requirement is to restore investor confidence in the financial markets, its effectiveness remains an open question.

The purpose of our study is to empirically test whether the CEO/CFO certification requirement of Sarbanes-Oxley has had any impact on investor confidence. MBA students from two AACSB accredited universities participated in a study in which they examined the financial statements and other information contained in the annual report of a Fortune 500 company. The results indicate that subjects’ level of knowledge of the CEO/CFO certification requirement is positively related to their confidence that the financial statements are free of material errors. In addition, subjects’ knowledge of the certification requirement was positively related to their belief that the CEO and CFO’s performance targets would be met and that these executives were diligent in their review of the financial statements. These results suggest that the CEO/CFO certification requirement of the Sarbanes-Oxley act is capable of enhancing investor confidence and that the investing publics’ awareness of the requirement is critical to its effectiveness.