SEC Ruling, Investor Confidence and Firm Valuation

Abstract

Prior studies suggest that a firm is valued higher when the shareholders are better protected. By examining the firms’ responses to the SEC Order No. 4-460, we find significant positive abnormal returns to those firms with correct certification. Those firms with timely certification are rewarded with higher valuation. Consistent with the notion that large outside blockholders have strong incentive to monitor managers, we find that outside blockholders play an important role in ensuring the accuracy and timeliness of financial reports. The equity-based compensation package may align the managerial interest with shareholders’ as a whole, but not necessarily with outside shareholders’.