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The Litigation Cost Implications of CEO’s and CFO’s Certification
Farshid Navissi,
Monash University
Vic Naiker, Auckland University
Mukesh Garg, Monash University
ABSTRACT. To improve corporate responsibility and protection of shareholders’ interest, the SEC’s proposal released on June 12, 2002, and the Exchange Act Rule 13a-14 released on June 27, 2002, required CEOs and CFOs of firms with revenues in excess of $1.2 billion to certify the accuracy of firms’ annual reports. Prior studies report inconclusive results on whether stockholders benefit from filing the certification requirement in August 2002. We conjecture that failure to investigate the initial SEC-events of June 12 and 27 is inconsistent with the notion of market efficiency, which suggests investors react instantaneously and unbiasedly to the initial announcements of the news. We examine the June 12 and 27 events and offer a litigation cost approach. We find that cost of certifying financial reports exceeds any potential benefits associated with the certification. The evidence indicates that the cost is more profound for firms operating in high-litigation-risk industries.
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