IPO Firms’ Voluntary Compliance with SOX 404 as Evidence on the Value Relevance of Internal Control Quality

Authors

  • Ivy Huang Queen’s College
  • Kimberly Gleason University of Pittsburgh
  • Leonard Rosenthal Bentley University
  • Deborah Smith Cleveland State University

Keywords:

initial public offering, Sarbanes-Oxley Act of 2002, internal control, auditing, voluntary disclosure, cost effectiveness, capital market, internal auditing, going public, underpricing

Abstract

Newly public firms are not required to comply with SOX 404 for their initial public offerings. This provides a unique setting in which to investigate the benefits of voluntary disclosure with SOX 404 and the value of information revealed as a consequence of compliance.  We investigate whether voluntary compliance with SOX 404, either fully or partially, impacts the perceived risk of firms conducting IPOs on the first day of trading (reflected in underpricing) or following the IPO. Our results indicate that neither full compliance with SOX 404 at the time of the IPO, nor a managerial discussion of internal controls prior to the IPO, result in lower underpricing or higher post-IPO performance. This suggests that the costs incurred through the SOX 404 compliance process may be unnecessary. Indirectly, our results provide additional evidence that some of the requirements of SOX extract costs from shareholders without supporting better quality information.

Author Biographies

Ivy Huang, Queen’s College

Assistant Professor of Accounting

Department of Accounting and Information Systems

Leonard Rosenthal, Bentley University

Professor

Department of Finance

Deborah Smith, Cleveland State University

Assistant Professor of Accounting

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Published

2016-12-31

Issue

Section

ABR Journal Articles