The Impact of Information Disclosure on Stock Market Returns: The Sarbanes-Oxley Act and the Role of Media as an Information Intermediary

The Sarbanes-Oxley (SOX) Act of 2002 is one of the, if not the, most important pieces of legislation affecting corporations traded on the U.S. stock exchanges. While SOX does not explicitly address the issue of information security, the definition of internal control provided by the SEC, combined with the fact that the reporting systems in all firms required to comply with SOX are based on systems that promote information security and integrity does imply that more focus on information security is a necessary compliance requirement. Using a dataset on stock market abnormal returns that runs from the period 2000-2006 and consists of 300 firms, we aim to examine how the stock market reaction varies for 8-K filings and news media releases, and how this reaction has changed since the passage of the SOX Act. We hypothesize that the greater timeliness of the 8-K filings induced by SOX increases and accelerates the quality of their information disclosure and dissemination in the market. Further, we classify news articles into pressand firm-initiated articles and hypothesize that the press-initiated coverage of material events has increased in the post-SOX period. We find that the effect of firm-initiated media coverage had significant negative impact relative to press-initiated coverage on the measures of informativeness suggesting that media played a significant role during the scandal-ridden periods when the firms had poor information environment between 2002 and 2004. We also find that the timeliness of release of media articles determines the level of informativeness, suggesting that media is an information intermediary and its role acts as a substitute to the firm‘s existing information disclosure environment.