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The change in investor reaction to 10-K filings after Regulation Full Disclosure and the Sarbanes–Oxley Act

Rakesh Bharati (Department of Economics and Finance, Southern Illinois University Edwardsville, Edwardsville, Illinois, USA)
Susan Crain (Finance and General Business Department, Missouri State University, Springfield, Missouri, USA)
Shrikant Jategaonkar (Department of Economics and Finance, Southern Illinois University Edwardsville, Edwardsville, Illinois, USA)

Managerial Finance

ISSN: 0307-4358

Article publication date: 9 January 2020

Issue publication date: 9 January 2020

328

Abstract

Purpose

The purpose of this paper is to examine whether the investor reaction to 10-K filings has changed since the implementation of Regulation Full Disclosure (FD) and the Sarbanes–Oxley Act (SOX) and examine whether the market still underreacts to 10-K content and exhibits the continuation of filing day returns (FDRs) documented by You and Zhang (2009) after the passage of these regulations.

Design/methodology/approach

The sample consists of 39,270 10-K filings over the sample period of 1996 to 2012. Performance of portfolios created based on FDRs around 10-K filings is examined. Regression models are used for multivariate analysis. Carhart αs are obtained using the four-factor risk adjustment model.

Findings

By comparing investor reaction to 10-K filings pre- and post-regulation, the paper shows a significant change in stock price behavior since the implementation of FD and SOX. Analogous to Burks (2011), results suggest improved price efficiency around 10-K filings. In the long-run of up to one year following the filing, the continuation of FDRs documented by You and Zhang (2009) disappears post-2000, especially after the implementation of SOX. Overall findings suggest that investors price the information in 10-K filings significantly differently after FD and SOX than before.

Research limitations/implications

The sample ends in 2012. Therefore, this study does not examine the implications of the Dodd-Frank Act.

Originality/value

The paper contributes to the literature related to the impact of FD and SOX and market reaction to filings of financial reports. The current literature documents that there is a continuation of FDRs up to a year. This paper shows that the continuation has disappeared since FD and SOX were implemented.

Keywords

Citation

Bharati, R., Crain, S. and Jategaonkar, S. (2020), "The change in investor reaction to 10-K filings after Regulation Full Disclosure and the Sarbanes–Oxley Act", Managerial Finance, Vol. 46 No. 1, pp. 120-138. https://doi.org/10.1108/MF-02-2019-0100

Publisher

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Emerald Publishing Limited

Copyright © 2019, Emerald Publishing Limited

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