Event-Based Materiality: An Exploratory Study in Response to Sarbanes-Oxley Section 409 and Regulation Fair Disclosure

Abstract

Both Section 409 of the Sarbanes-Oxley Act (2002) and Regulation Fair Disclosure (2000) were created to significantly improve the timeliness of disclosures and help specify which events should be deemed material. We examine if nonprofessional investors can correctly discriminate-and subsequently assess-material events from immaterial events. We conduct a series of experimental asset markets where participants acting as investors are presented with sequential pieces of information regarding events that are either material or immaterial (as defined by the SEC). Our findings indicate that nonprofessional investors do not accurately discriminate between material and immaterial events as reflected by trading prices. Also, we find that subsequent disclosures increase investors' pre-disclosure knowledge base resulting in an increase in homogeneity of investors' beliefs at the end of a sequence relative to the beginning of the sequence. The increase in the homogeneity of beliefs results in relatively lower trading volume.