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The Effect of Control Rhetoric on Investment Opinion: A Comparative Study of Pre and Post Sarbanes Oxley
Hui Lin,
Virginia Polytechnic Institute and State University
Tracy N. Reed, Virginia Polytechnic Institute and State University
ABSTRACT. The Sarbanes-Oxley Act of 2002 has likely increased public awareness of the importance of internal controls and corporate governance. Firms are likely to find different ways to signal investors that they find these issues important by using control rhetoric, specific words related to internal controls and corporate governance. This study employs a mixed methods approach, using archival and experimental methods. We develop a list of words considered control rhetoric, and analyze CEO letters to the shareholders from randomly-selected firms between 2000 and 2005. Results indicate that control rhetoric increased after 2002 for small, medium and large cap firms. We also examined the relationship between control rhetoric and investor opinion experimentally. Results indicate that, while subjects observed the difference in the amount of control rhetoric, this difference does not make a significant impact on the decision to invest in a company.
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