IMPACT OF INTERNAL CONTROL OVER FINANCIAL REPORTING UNDER THE SARBANES-OXLEY ACT ON A FIRM’S STOCK PRICE AND STOCK VOLATILITY

Morsheda Hassan
Grambling State University

Raja Nassar
Louisiana Tech University

Aaron Whitherspoon
Grambling State University

ABSTRACT
This study examines the impact of the first filing of the annual financial report 10-K by
public firms after the enactment of the Sarbanes-Oxley (SOX) Act in July 30, 2002 on the stock
price and volatility. Form 10-K is an annual report required by the Securities and Exchange
Commission (SEC) of public firms after the enactment of the Sarbanes-Oxley Act. It is a
comprehensive report on a firm’s financial performance with reporting on management internal
control and independent auditors’ verification of the report. Companies encounter extra cost in
meeting the new regulations in reporting and it is of interest to determine if in return there is an
accrued benefit to the companies in terms of stock price and stability on the capital market. A
random sample of 77 companies was chosen from the list of companies on the New York Stock
Exchange (NYSE) that had filed the 10-K form and reported on internal control, with no material
deficiencies, which was verified by an independent auditor.
Results of the statistical analysis indicated that there was no significant change in
volatility between the two periods, before and after the first filing. A time series intervention
analysis showed that in 8 companies there was a positive impact of first filing on price. On the
other hand, the auto-regression analysis showed that first filing had a positive impact in 6
companies. One company showed a negative impact for both analyses. Based on these results, it
seems that reporting on internal control had little effect on stock prices of the companies
examined. Only 8-10 percent of the companies showed a positive effect of first filing. The rest of
the companies did not show any effect.

Keywords: Sarbanes-Oxley (SOX), 10-K filing, stock price, price volatility