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Information Content of Public Firm Disclosures and the Sarbanes-Oxley Act

2010; RELX Group (Netherlands); Linguagem: Inglês

10.2139/ssrn.1584763

1556-5068

Shimon Kogan, Bryan Routledge, Jacob S. Sagi, Noah A. Smith,

Corporate Finance and Governance

We find evidence that public firm disclosure, in the form of Management Discussion and Analysis (Sections 7 and 7a of annual reports), is more informative about the firm's future risk following the passage of the Sarbanes-Oxley Act of 2002. Employing a novel text regression, we are able to predict, out of sample, firm return volatility using the Management Discussion and Analysis section from annual 10-K reports (which contains forward-looking views of the management). Using the relative performance of the text model as a proxy for the informativeness of reports, we show that the MD&A sections are significantly more informative after the passage of SOX. We further show that this additional information is associated with a reduction in share illiquidity, suggesting that the information divulged was new to investors. Finally, we find that the increase in informativeness of MD&A reports is most pronounced for firms with higher costs of adverse selection.