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American Accounting Association2006 Midwest Region MeetingMarch 30 – April 1
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Friday, March 31, 4:00 p.m. to 5:40 p.m.
Concurrent session 4D - Corporate Governance and Fraud (Auditing)Title: The Effects Of The SEC’s Accounting And Auditing Enforcement Releases On The Market Response To Earnings Information
Joon S. Yang
University of Minnesota DuluthEhsan H. Feroz
University of Washington, TacomaJerry W. Lin
University of Minnesota DuluthABSTRACT: The Securities and Exchange Commission (SEC) is responsible for maintaining and regulating the financial accounting and reporting rules that public companies must follow. The agency announces its accounting-related enforcement actions in the Accounting and Auditing Enforcement Releases (AAERs). The AAER announcements are expected to signal important messages about the financial conduct or reporting by the registrants violating accounting regulations. Previous research documents negative stock price reactions to the news of firms being investigated by the SEC for violating accounting regulations. In this study, we look at stock market responses to the earnings announcements of the firms investigated by the SEC for having issued false or misleading financial reports.
The SEC enforcement action is expected to negatively affect investors’ perception of a company’s financial reporting process. That is, an SEC enforcement action has the potential to affect the stock market’s expectation by signaling to the market that earnings reported by the firm is nosier (less precise) than previously assumed. The lower the earnings precision is, the less investors learn about the firm’s operating results and the lower the stock price reaction to reported earnings will be. Specifically, we investigate whether firms experience lower earnings response coefficients (ERCs) after they are cited in the AAERs issued between 1999 and 2003. The results indicate that (i) the ERCs of the firms included in the AAERs are lower than those of the firms not included in the AAERs, and (ii) for the firms included in the AAERs, the ERCs for the post-AAER periods are lower than the ERCs of the same firms for the pre-AAER periods.