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Bynum, Cindy. Thesis Final

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Bynum, Cindy. Thesis Final

  1. 1.   1   Stock Price Reactions to Accounting Fraud The University of Tennessee Undergraduate Thesis Cynthia Bynum 30 April 2012 Global Leadership Scholars Advisor: Dr. Deborah Harrell
  2. 2.   2   Abstract This paper documents a four-way analysis of the stock price reactions to lawsuits brought against a company for corporate misconduct. The four-way analysis interprets the stock price reactions to lawsuit filings both pre- and post- Sarbanes Oxley Act of 2002 (SOX), and class action lawsuits and non class action lawsuits. The reactions are based on the announcement date with a ten-day window both before and after the date. This is based on the assumption that information can be leaked to the media or stockholders before the announcement day and in order to grasp the actual affect for days after the announcement day. With this research, I expect to find a negative stock reaction in all companies when an announcement of corporate misconduct is made. This negative reaction will show that shareholders are not as confident of the profitability or success of that company. It may also serve as society’s punitive damage for the mistrust that it has placed among its consumers, shareholders, and stakeholders. I also expect to find that companies facing lawsuits for corporate misconduct post-SOX will experience a more negative reaction than those pre-SOX. My assumption is based on SOX being a far-reaching reform of regulatory policies of companies’ business practices. I see this as holding companies to a higher standard with more regulations and policies to follow. I also expect companies with class action lawsuits to face a larger negative stock reaction than companies without class action lawsuits. To be declared a class action lawsuit, many prerequisites and trial hearings are required before it can legally be entitled as a class action lawsuit. This presumes that the company has wronged a multitude of stakeholders. Non-class action lawsuits do not have the court hearing as a prerequisite and may include just one party or individual that has been wronged by the company. I will run regression analyses on the closing stock prices to test my assumptions.
  3. 3.   3   I. Motivation When deciding in the infinite realm of topics what to conduct my research on for my thesis, I knew I wanted something intriguing and related to the financial prosperity of businesses. Corporate misconduct and financial fraud have always been intriguing topics to me. Though, I find it more interesting the lengths that companies reach to cover any traces of misconduct. This led me to the curiosity of what happens to companies when they are charged of accounting fraud. Accounting fraud can be defined in a multiple of ways. Common cases of accounting fraud include “cooking the books” by hiding large expenses, overstating revenues, overstating assets, understating liabilities, etc. My research assumes that accounting fraud is any deception or misleading information released in accounting and financial statements that leads the company to appear in a healthier financial position than what they actually are. My research does not focus on any particular type of accounting fraud such as price-fixing or overstating revenues. Instead, it covers a wide array of accounting fraud. The framework of my study will be compiled by analyzing thirty-two different companies accused of accounting fraud. This number is broken down into four different categories giving the four-way analysis. These categories were selected by a sparked interest of how price reactions changed both after SOX was passed and if the classification was a class action lawsuit. These two specifications are important as I can see significant roles that they play in the business world. When SOX was passed, many new regulations, policies, and rules were issued to help monitor and facilitate good business practices. It was the biggest reform in financial reporting since the 1930s (Cahan). So, it would be a great specification to use to measure how stock prices were affected both before and after the reform. The other stipulation on my research is class action lawsuits. Class action lawsuits are when a class of people or
  4. 4.   4   parties comes together to file a lawsuit against a company who wronged them in the similar manner. It is common for shareholders to gather and file class action lawsuits against the company for which they hold shares (Eble). This stipulation also has great significance. Class action lawsuits have many prerequisites and go through a trial before it is recognized as a class action lawsuit. This would suggest that with more people being affected and it already being processed through a court trial that there would be a greater negative reaction to the stock prices. It would be interesting to study the difference in the stock reactions for companies with class action lawsuits filed against them and companies without. These two specifications are being used for comparison of whether they really have an affect on reaction of stock prices when a company is accused of corporate misconduct. In the awakening of the twenty first century, America witnessed a widespread of financial scandals with some of the major influences being Enron and WorldCom. Enron was an American energy company that was based out of Houston, Texas. During the time period of Enron’s scandals, it was the seventh largest company in the U.S. (EBSCOhost). In November 1997, Enron began its transactions that enabled it to hide its debts from the public eye. Enron accomplished this by buying out stakes in a company called JEDI. Enron then sold the stakes to a firm, which it created called Chewco. Three and a half years later in February 2001, three critical events happened that caused a decline in stock prices: Arthur Andersen made claims of dropping Enron as a client, Kenneth Lay stepped down from CEO with Jeffrey Skilling taking his place, and FORTUNE magazine made claims that Enron was piling on debt while keeping it hidden from Wall Street (Time U.S. and Time Specials). In August, the newly appointed CEO Jeffrey Skillings resigned, totaling six senior executives leaving the company within the past year (Time Specials). From this point until Enron filed what was then the largest bankruptcy in
  5. 5.   5   U.S. history on December 2, the scandals of Enron began to unravel quickly. Arthur Andersen was quick to rid all of their basic documents with Enron, and the Securities Exchange Commission filed for an inquiry of Enron’s financial statements (Time Specials). The scandals incurred by Enron led not only to its bankruptcy but also led the Arthur Andersen accounting firm, one of the five largest in the world, to an early end. Enron shareholders lost nearly $11 billion. Price per share hit an all time high of $90 in mid 2000, then by October 2001 had plummeted to less than $1 per share. By the time the stock closed the day Enron filed for bankruptcy, it was only trading for $0.26 (Time Specials). Enron was the US’s largest bankruptcy until the WorldCom scandals the following year. WorldCom was once US’s second largest long distance phone company. WorldCom was considered to have a solid business strategy as they were acquiring a lot of telecommunication companies during the wake of the technology boom (Moberg). WorldCom went from a Wall Street favorite to a surprising record bankruptcy. The CEO of WorldCom, Bernie Ebbers, joined the company in 1985 when it was formerly know as Long-Distance Discount Services (LDDS) (Washington Post). WorldCom, known for its strategic business plan of making acquisitions, completed three mergers in 1998.One the mergers was with MCI Communications Corporation for $40 billion, making it the largest merger in history at that time (Washington Post). The company continued to merge, but it started to draw attention to the Securities and Exchange Commission who requested information for WorldCom’s accounting procedures in March 2002. Shortly following, credit ratings were being cut, and CEO Bernie Ebbers resigned in late April. Investigations into WorldCom’s financials suggest improper reporting dating back to 1999, and the company filed for bankruptcy protection on July 21, 2002 (Washington Post). WorldCom became the largest bankruptcy in US history (Beltran).
  6. 6.   6   These record setting scandals and bankruptcies are what gave push for the passing of SOX. The changes that the US faced were swift, and the Public Company Oversight Board (PCAOB) laid down stiff rules for the financial reporting and auditing for companies (Cahan). Even those these regulations were issued, it does not prevent another major accounting scandal. However, with these changes in regulations, we can compare companies before and after to see if it does affect companies (Cahan). II. Related Research The Sarbanes-Oxley Act of 2002 The Sarbanes Oxley Act of 2002 (SOX) was Congress’ effort to respond to corporate scandals and used to restore confidence in the stock markets. Again, it was the largest accounting reform in the US since the 1930s. It was nothing to be taken lightly. After a wave of scandals was uncovered in the start of the 21st Century, Congress had to enact provisions to protect shareholders and the general public from fraudulent practices. These regulations covered a range of topics and people: Public Company Accounting Oversight Board, Auditor Independence, Corporate Responsibility, Enhanced Financial Disclosures, etc. To help explain the strict regulations placed on companies, here are a couple of examples of rules set in place by SOX: Sec. 301‘‘(2) RESPONSIBILITIES RELATING TO REGISTERED PUBLIC ACCOUNTING FIRMS.—The audit committee of each issuer, in its capacity as a committee of the board of directors, shall be directly responsible for the appointment, compensation, and oversight of the work of any registered public accounting firm employed by that issuer (including resolution of disagreements between management and
  7. 7.   7   the auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related work, and each such registered public accounting firm shall report directly to the audit committee.” Sec. 401 “(b) COMMISSION RULES ON PRO FORMA FIGURES.—Not later than 180 days after the date of enactment of the Sarbanes-Oxley Act of 2002, the Commission shall issue final rules providing that pro forma financial information included in any periodic or other report filed with the Commission pursuant to the securities laws, or in any public disclosure or press or other release, shall be presented in a manner that— (1) does not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the pro forma financial information, in light of the circumstances under which it is presented, not misleading; and (2) reconciles it with the financial condition and results of operations of the issuer under generally accepted accounting principles.” (U.S. Securities and Exchange Commission) In late 2001, American headlines covered the unraveling of the Enron and Andersen scandals. Closely followed by these were ImClone, Global Crossing, and other similar stories of companies falsifying their financial records. At first, Congress did little in reaction to these events. Though, several committees commenced hearings, and several new bills were introduced to address the recent trend of corporate misconduct. However, at the time, the Senate was under Democratic control and the Republican Party controlled the House of Representatives. The differences between these two legislations were so extreme that is appeared that the effort for
  8. 8.   8   corporate reform had stalled (Spurzem). During the times that the committees were meeting, two men, Michael Oxley and Paul Sarbanes, were in the making of a bill to be passed to set regulations on companies to provide honest representation of financials. In late April 2002, the House of Representatives passed Representative Michael Oxley’s bill in an attempt to create a reform and put a stop to the wave of scandals. Shortly after this in June, WorldCom announced that it had been overstating its earnings for the past fifteen months. This put legislation into full gear to get a bill passed to stop companies from these scandals. On June 25, Senator Sarbanes introduced his bill to the full Senate, and it was passed on July 15. The conference committees that were meeting reconciled the differences between these two bills. They approved the full bill and named it the Sarbanes-Oxley Act of 2002 on July 24, 2002. The bill became enacted on July 30 when President George W. Bush signed it into law (Digital Pathways). Although SOX was enacted on July 30, 2002, the complicated bill took over a year to fully be enforced, ranging from the date it was enacted until December 15, 2003. The bill was broken into several topics, which were broken into numerous different effective dates. Examples of these broken down effective dates include: “Topic 101 (d) Public Company Oversight Board: Effective Date: SEC determination no later than April 26, 2003” “Topic 406 Senior Management Code of Ethics: Effective Date: Final rule issued by the SEC on January 23, 2003. Rule is effective for fiscal years ending on or after July 15, 2003.” (PricewaterhouseCoopers)
  9. 9.   9   Legislation passed SOX in an attempt to protect shareholders and the general public from companies behaving with corporate misconduct. It was also a warning to companies of the consequences if caught in their actions. SOX enacted guidelines for how companies should report their financial statements, limiting the number of loopholes that companies could use to fraudulently misrepresent their financial performance. SOX also includes the responsibility that companies have to their employees, shareholders, customers, and the public, in general. A code of ethics is something else that can be found in SOX. Following the law can be the minimal of ethics, so it is important for companies to understand that following the law is just the bare minimum. With these guidelines set in place, companies are held to a much higher standard in honestly and accurately reporting the financials of their companies. My research will show us if stock prices were affected by these new regulations set in place. More reform may be a solution if companies are unaffected by SOX and are still fraudulently depicting the financial statements of the company. Class Action Lawsuits For the other part of my research that I am conducting, I am analyzing whether lawsuits against companies experienced a larger impact on stock prices if they were class action lawsuits. A class action lawsuit is defined as a type of lawsuit in which a large group of people collectively brings a claim against the same defendant. This type of lawsuit is prominent in the United States in which it was originated (Eble). For my study, I will be comparing the reaction of stock prices in companies with class action lawsuits versus companies with lawsuits or allegations that are not class action. Class action lawsuits have many prerequisites and go through a court process before being declared a class action lawsuit. It is a topic of study
  10. 10.   10   because it will be interesting to see if being a class action lawsuit has a bigger negative reaction to stock prices. Class action lawsuits tend to be taken more serious as there has already been a court overseeing the lawsuit, classifying it as class action. There are four prerequisites to class action lawsuits: 1. The class is so numerous that joinder of all members is impracticable (numerosity); 2. There are questions of law or fact common to the class (commonality); 3. The claims or defenses of the representative parties are typical of the claims or defenses of the class (typicality); and 4. The representative parties will fairly and adequately protect the interests of the class (adequacy of representativeness) (Rule 23). In a short time after a person sues as a class representative, the court will determine by order whether to certify the action as a class action. The order will determine the type of class and appointing the class counsel. After the class is issued, defined and appointed counsel, the order may be altered or amended before final judgment. All members of a class may be identified and offered a notice after the final judgment of the class is made. The notice should include the nature of the action, the definition of the class certified, the class claims, the right to an attorney, the right to seek exclusion from the class and the protocol for this exclusion, and the binding effect of a class judgment on members. Some of the top class action lawsuits include AOL Time Warner who settled for $2.5 billion, Tyco Telecommunications who settled for $3.2 billion, Exxon who was ruled to pay $5 billion (late reduced to $500 million), WorldCom who settled for $6.2 billion, and Enron who settled for $7.2 billion (American Greed). All of these companies had class action lawsuits filed against the after a court found that they had met all of the prerequisites and thought it was a viable reason. The majority of lawsuits are settled outside of the court system either through
  11. 11.   11   negotiation, mediation, or arbitration (Obringer). It will not be common to find lawsuits make it through the entire court process. An alternative settlement seems enticing to many companies, as it would save much time and a lot of court expenses. Class action lawsuits must follow procedural law. There are many steps and actions that must be taken before a class action lawsuit is bind by law. With the steps taken, much time must be allocated to define the class and make final judgment of the class and their lawsuit. This must be taken into consideration when judging the effects of the stock prices. My research will show if class action lawsuit cases have a larger affect on stock prices. III. Hypothesis After further research into the stipulations and guidelines of SOX, I expect to find that the sixteen companies with allegations of accounting fraud post-SOX will experience larger negative stock effects than those of the sixteen pre-SOX. More so, I expect to find the companies with class action lawsuits filed against them to experience a greater negative stock price reaction as compared to those companies without class action lawsuits. Class action lawsuits go through a lengthier litigation process and have a more sever punishment for companies. This gives adherence as to why I expect this sample to experience a more negative stock price reaction. IV. Methodology For  my  topic,  I  am  researching  the  stock  price  reaction,  if  any,  that  occurred  to   thirty-­‐  two  companies  once  an  allegation  was  lodged  against  the  company  for  accounting   fraud.  My  research  consisted  of  collecting  a  significant  amount  of  primary  data.  The  thirty-­‐ two  companies  consist  of  sixteen  companies  whose  litigations  occurred  before  the  
  12. 12.   12   Sarbanes-­‐Oxley  Act  (SOX)  of  2002  and  sixteen  companies  with  litigations  occurring  after   SOX  was  in  full  effect.  Like  many  large  reforms,  SOX  was  broken  down  into  several  topics,   covering  different  aspects  of  the  financial  reporting  process.  These  different  topics  had  a   wide  array  of  dates  in  which  the  bill  was  to  be  enacted,  even  though  it  was  signed  into  law   on  July  30,  2002.  These  dates  of  enactment  ranged  from  July  30,  2002  until  December  15,   2003.  Chart  1  gives  a  more  visual  aid  for  the  enactment  dates.  For  this  reason,  the   companies  chosen  for  the  pre-­‐  and  post-­‐  SOX  study  were  all  chosen  with  announcement   dates  of  lawsuit  either  prior  to  July  2002  or  after  the  year  ending  2003.    This  would  yield  all   pre-­‐SOX  companies  to  have  announcement  dates  prior  to  July  1,  2002  and  all  post-­‐SOX   companies  to  have  announcement  dates  after  January  1,  2004.  This  stipulation  is  to  prevent   complication  and  confusion  for  the  pre-­‐  and  post-­‐SOX  companies.  Then,  to  further  my   analysis,  of  the  sixteen  companies  both  pre-­‐  and  post-­‐  SOX,  they  were  divided  into  eight   class  action  lawsuits  and  eight  non-­‐class  action  lawsuits.  This  will  give  me  a  four-­‐way   analysis  in  comparing  effects  of  stock  prices.  There  are  class  action  lawsuits  versus  non-­‐ class  action  lawsuits  and  pre-­‐SOX  versus  post  -­‐SOX.            
  13. 13.   13     Chart  1.  Outlined  is  the  number  of  topics  that  became  effective  on  various  dates  ranging  from  July  31,  2002   until  December  15,  2003.  This  does  not  include  all  topics  in  the  Sarbanes-­‐Oxley  Act  of  2002.  Some  topics  of   the  Act  were  not  given  an  effective  date.  The  dates  listed  are  not  actual  effective  dates,  but  rather  month  end   dates,  so  it  encompasses  the  number  of  topics  that  became  effective  during  that  given  month.     My  sample  data  consists  of  thirty-­‐two  companies  in  total  that  faced  allegations  for   corporate  misconduct.  For  the  class  action  lawsuits,  I  used  the  class  action  lawsuit  filings   off  Stanford’s  securities  website,  http://securities.stanford.edu.  Under  the  filings  section,  I   randomly  selected  sixteen  companies,  eight  whose  litigation  dates  were  before  July  2002   and  eight  whose  litigation  dates  were  after  January  1,  2004.    Companies  that  were   randomly  selected  but  did  not  meet  the  requirements  were  thrown  out  and  another   company  was  chosen  at  random.  The  companies  chosen  had  to  meet  the  requirements  of   being  a  publically  traded  company,  having  historical  stock  prices  available,  and  having   stock  price  returns  data  publically  available  for  the  event  window  occurring  in  the  set  pre-­‐  
  14. 14.   14   or  post-­‐SOX  time  frame.  To  account  for  bias,  another  specification  added  on  to  my   empirical  research  was  that  I  have  no  prior  knowledge  of  the  company.  Of  the  two  hundred   eighty-­‐six  companies  posted  on  Stanford’s  securities  website,  only  seventeen  companies   met  the  requirements,  eight  post-­‐SOX  and  nine  pre-­‐SOX.  This  explains  my  small  sample   size,  as  I  was  very  limited  to  the  companies  that  met  the  qualifications  for  my  research.  My   randomized  selection  was  based  off  blindly  pointing  at  a  company  and  testing  to  see  if  it   met  the  specifications.  If  it  did  not,  then  it  was  crossed  out  and  another  company  was   selected.  Chart  2  identifies  the  sixteen  class  action  lawsuits  companies,  both  pre-­‐  and  post-­‐ SOX  that  were  selected  for  my  study.   Chart  2.  Identified  are  the  sixteen  companies  selected  as  the  class  action  lawsuits  sample  of  my  research.     For  the  non-­‐class  action  lawsuits,  I  used  the  LexisNexis  Academic  database.  The   same  requirements  were  applied  to  non-­‐class  action  lawsuits  categories  as  well:  to  account   for  bias,  I  must  have  no  previous  knowledge  of  the  company,  it  must  be  a  publically  traded   company,  have  historical  stock  prices  available,  and  have  an  announcement  date  in  the  set  
  15. 15.   15   pre-­‐  or  post-­‐SOX  time  frame.  The  companies  that  met  these  requirements  were  then   crossed  check  with  the  Stanford  database  to  ensure  that  they  did  not  fall  into  the  class   action  lawsuit  sample.  My  selection  process  for  this  part  of  my  sample  was  still  random,  but   it  was  conducted  in  a  different  manner.  Using  LexisNexis,  I  used  key  terms  to  search  all   major  publications  for  companies  accused  of  accounting  fraud.  Key  terms  used  to  search   for  companies  include:  accounting  fraud,  financial  fraud,  corporate  misconduct,  accounting   scandals,  price-­‐fixing,  fraud,  and  financial  scandals.  Again,  I  randomly  selected  companies   and  tested  the  criteria.  If  the  company  did  not  meet  the  qualifications,  then  it  was  thrown   out,  and  the  selection  process  continued.  Through  this  process,  I  identified  one  hundred   forty-­‐three  companies.  Only  twenty  companies  met  the  qualifications  for  this  sample,  and   sixteen  were  randomly  selected.  Chart  3  lists  the  companies  chosen  for  the  non-­‐class  action   lawsuit  sample.   Chart  3.  Identified  are  the  sixteen  companies  selected  as  the  non-­‐class  action  lawsuits  sample  of  my  research      
  16. 16.   16     The  announcement  date  for  my  samples  is  the  date  in  which  the  allegations  were   made  public.  To  encompass  a  range  of  possibilities  to  capture  stock  price  reactions,  I  will   use  an  event  window  period.  This  includes  ten  days  prior  to  the  announcement  date  to   account  for  early  leakage  to  the  media  or  shareholders  and  ten  days  after  the   announcement  date  to  capture  the  actual  public  reaction  to  the  allegations.  This  creates  a   twenty-­‐one  day  event  window,  including  t=o  as  the  announcement  date.  Prior  to  the  event   window,  I  pulled  a  year  worth  of  stock  prices  to  be  able  to  calculate  the  normal,  expected   return.  Using  a  regression  analysis,  the  assumed  stock  price  for  the  announcement  day  can   be  calculated.  It  can  then  be  compared  to  the  actual  stock  price  for  the  announcement  day.   This  comparison  will  allow  the  analysis  of  the  actual  shock,  if  any,  of  the  stock  prices  on  the   date  the  allegation  was  announced.     For  the  regression  analysis,  the  closing  prices  have  been  pulled  from  the  Bloomberg   Database.  Yahoo  Finance  proved  to  be  an  unreliable  and  inaccurate  source  of  data  for  my   research.  It  was  my  original  source  of  stock  price  information,  but  after  providing   inaccurate,  insufficient,  or  unreliable  data  for  specific  stocks,  it  has  become  a  mere   checkpoint  for  certain  stock  prices.  Bloomberg  has  provided  all  of  the  closing  stock  prices   and  can  account  for  dividends  paid.         The  date  of  the  first  public  announcement  of  accounting  fraud  will  be  set  as  t=0.  The   ten  days  prior  to  the  announcement  date  will  be  t=-­‐10,  t=-­‐9…  with  t=-­‐1  being  the  day   before  the  announcement  date.  The  ten  days  after  the  announcement  date  will  be  t=1,  t=2…   with  t=10  being  the  tenth  day  after  the  announcement  was  made  public.  Using  the  Brown  
  17. 17.   17   and  Warner  (1985)  standard  event  study  methodology,  I  was  able  to  capture  the  stock   price  reactions  during  the  event  window  of  the  first  public  announcement.  I  was  able  to   examine  the  single  day  abnormal  returns,  ARt  and  the  multi-­‐day  cumulative  abnormal   return,  CAR(a,b),  where  a  and  b  indicate  days  that  are  relative  to  t=0.     For  sufficient  regression  results,  there  must  be  a  minimum  of  150  days  prior  to  the   event  window.  For  my  study,  250  days  were  used,  giving  roughly  a  year’s  worth  of  daily   returns  prior  to  the  event  window.  Using  the  250,  t=-­‐11  to  t=-­‐260,  days  prior  to  the  event   window,  I  calculated  the  Beta,  β,  and  the  Intercept,  α,  using  a  least  square  regression  of   € rit   and   € rmt  to  use  in  the  equation  to  define  the  abnormal  return.  The  Brown  and  Warner   (1985)  market  model  used  for  abnormal  returns  for  firm  i  is  defined  as                                                                                                                 € Rit = rit − αi − βirmt                                                                                                                (1)   where   € rit  represents  the  firm  i’s  common  stock  on  day  t,  and   € rmt  is  the  return  on  the   Standard  and  Poor’s  (S&P  500)  return  on  the  index  of  day  t.  To  calculate  the  average   abnormal  return  for  each  day  t  in  the  event  window,  it  was  computed  as                                                                                     € ARt = 1 Nt Rit i=1 Nt ∑ # $ %% & ' ((                                                                                                                  (2)   where   € Nt  represents  the  number  of  firms  in  the  average  on  day  t.  The  cumulative  average   return  was  calculated  as                                                                                         ∑= = b at tARbaCAR ),(                                                                                                                          (3)   where  a  and  b  are  days  relative  to  the  announcement  date.  
  18. 18.   18   V.  Data  and  Results   Table  1.  The  daily  abnormal  returns  during  the  event  window  are  based  on  the  Beta  and  Intercept  over  the   period  -­‐260  days  to  -­‐11  days  relative  to  the  event  period  of  the  announcement  date.  This  table  lists  the  daily   abnormal  returns  during  the  event  window  for  the  eight  companies  in  the  post-­‐SOX  and  class  action  lawsuit   category  and  the  average.       Table  2.  The  daily  abnormal  returns  during  the  event  window  are  based  on  the  Beta  and  Intercept  over  the   period  -­‐260  days  to  -­‐11  days  relative  to  the  event  period  of  the  announcement  date.  This  table  lists  the  daily   abnormal  returns  during  the  event  window  for  the  eight  companies  in  the  pre-­‐SOX  and  class  action  lawsuit   category  and  the  average.    
  19. 19.   19     Table  3.  The  daily  abnormal  returns  during  the  event  window  are  based  on  the  Beta  and  Intercept  over  the   period  -­‐260  days  to  -­‐11  days  relative  to  the  event  period  of  the  announcement  date.  This  table  lists  the  daily   abnormal  returns  during  the  event  window  for  the  eight  companies  in  the  post-­‐SOX  and  non-­‐class  action   lawsuit  category  and  the  average.       Table  4.  The  daily  abnormal  returns  during  the  event  window  are  based  on  the  Beta  and  Intercept  over  the   period  -­‐260  days  to  -­‐11  days  relative  to  the  event  period  of  the  announcement  date.  This  table  lists  the  daily   abnormal  returns  during  the  event  window  for  the  eight  companies  in  the  pre-­‐SOX  and  non-­‐class  action   lawsuit  category  and  the  average.    
  20. 20.   20   Table  5.  Cumulative  average  abnormal  returns  are  calculated  using  the  Brown  and  Warner  (1985)   methodology.  The  CARs  are  measured  relative  to  the  announcement  date  of  t=0.  The  whole  sample  includes   all  thirty-­‐two  companies  from  the  four  different  categories.  Post-­‐Sarbanes-­‐Oxley  2002  includes  sixteen   companies,  eight  class  action  lawsuits  and  eight  non-­‐class  action  lawsuits.  Then  the  class  action  lawsuits  and   non-­‐class  action  lawsuits  make  up  the  fourth  and  fifth  category.  Then,  all  four  categories  are  separated  for   comparison.      
  21. 21.   21     After  calculating  the  abnormal  returns  and  the  cumulative  average  abnormal   returns,  my  results  suggest  that  there  is  no  difference  between  pre-­‐SOX  (-­‐0.04017)  and   post-­‐SOX  (-­‐0.04778).  However,  there  does  appear  to  be  a  difference  between  Post-­‐SOX   class  action  lawsuits  (.007713)  and  pre-­‐SOX  class  action  lawsuits  (-­‐0.00461)  and  also   between  class  action  lawsuits  (0.001552)  and  non-­‐class  action  lawsuits  (-­‐0.0895).   Although,  it  should  be  noted  that  given  my  small  sample  size  of  only  thirty-­‐  two  firms,  I  am   unable  to  test  if  these  differences  are  statistically  significant.  Given  the  time  frame  that  I   used  (1997-­‐2011),  there  were  not  enough  companies  that  met  the  data  qualifications.   Through  much  research,  it  has  become  apparent  that  in  order  to  encompass  enough   companies  for  my  research,  my  time  frame  would  need  to  be  altered  and  extended.  Other   studies  such  as  that  done  by  Murphy,  Shreives,  and  Tibbs  encompass  394  companies  using   the  time  frame  from  1982-­‐1996.    My  specification  to  reduce  bias  by  eliminating  companies   with  previous  knowledge  also  limited  my  research  sample  size.       After  compiling  my  research  and  analyzing  the  data,  my  hypothesis  has  been   rejected.  I  hypothesized  that  the  firms  with  announcement  dates  post-­‐SOX  would  have  a   larger  negative  stock  effect  than  those  with  announcement  dates  before  SOX.  I  also   concluded  that  companies  with  class  action  lawsuits  would  experience  greater  negative   effects  than  companies  with  class  action  lawsuits.  However,  as  my  results  show,  there   appears  to  be  no  substantial  difference  between  pre-­‐SOX  and  post-­‐SOX  companies.  And   contrary  to  my  hypothesis,  the  companies  with  non-­‐class  action  lawsuits  appear  to   experience  a  larger  negative  stock  effect.  Again,  I  am  unable  to  test  if  this  is  significant  due   to  the  small  sample  size.  Future  research  can  be  conducted  to  help  explain  my  findings  and   test  for  the  significance  of  the  differences  in  the  cumulative  average  returns.  
  22. 22.   22   VI.  Future  Research     Further  research  would  be  needed  to  maybe  help  explain  why  class  action  lawsuits   saw  a  much  less  effect  than  the  non-­‐class  action  lawsuits  category.  One  reason  may  be  due   to  bankruptcy  filings  prior  to  the  announcement  date,  which  would  cause  a  large  negative   effect  at  the  bankruptcy  announcement.  This  could  take  away  from  the  negative  effect  of   the  accounting  fraud.  Other  factors  that  could  contribute  to  my  findings  could  be  the  size  of   the  company,  the  number  of  stockholders,  the  number  of  shares  outstanding,  the  industry   of  the  company,  the  revenues  of  the  company,  the  type  of  the  accounting  fraud,  etc.     I  would  like  to  conduct  future  research  into  companies  to  see  if  insider  secrets  or   bankruptcy  played  a  significant  role  the  effects  of  the  stock  prices.  Some  of  the  companies   included  in  my  samples  faced  large  negative  effects  after  filing  for  bankruptcy,  which   usually  occurred  a  few  months  before  the  announcement  of  accounting  fraud  was  made.   This  factor  could  have  made  a  huge  impact  on  why  there  was  not  such  a  dramatic  effect   when  the  fraud  was  announced.  Another  factor  could  have  been  that  the  major   stockholders  in  the  company  could  have  been  informed  prior  to  the  allegations  and  started   to  sell  their  stock.  This  could  have  a  more  gradual  effect  on  the  price  of  the  stock  as   opposed  to  the  immediate  effect  expected  when  the  announcement  is  made.  Further   research  needs  to  be  conducted  to  determine  if  these  factors  played  a  meaningful  role  in   the  stock  price  reactions.       Since  my  sample  size  was  rather  small,  future  research  would  need  to  be  conducted   with  a  larger  sample  size  to  see  if  the  differences  are  statistically  significant.  With  a  larger   sample  size,  given  a  larger  scale  of  time,  different  results  may  be  concluded,  but  the  
  23. 23.   23   difference  can  be  test  for  statistical  significance.  I  would  suggest  analyzing  a  minimum  of   thirty  companies  in  each  classification  group  in  order  for  it  to  render  significant  results.       Future  research  can  also  be  conducted  to  test  to  see  if  the  industry  plays  a   significant  role  in  the  stock  price  reactions.  In  my  research,  I  found  that  many  companies   were  either  in  the  energy,  communications,  or  health  industry.  Therefore,  it  would  be   interesting  to  see  if  certain  industries  experience  occurrences  of  accounting  fraud  more   frequently  and  if  particular  industries  experience  a  larger  negative  stock  effect.  It  would  be   interesting  to  find  out  if  the  public  is  more  involved  through  stocks  with  choice  industries   as  opposed  to  other  industries.   VII.  Conclusion     There  were  some  limitations  to  my  research  that  may  have  affected  my  results.    Due   to  my  specific  qualifications  for  companies  for  my  research,  I  was  only  able  to  use  a  sample   size  of  thirty-­‐two.  This  sample  size  is  not  large  enough  to  test  if  the  differences  in  my   results  are  significant  or  not.  With  such  a  small  sample  size,  any  one  company’s  data  could   have  skewed  all  of  the  data  for  that  particular  category.  Therefore,  future  research   conducted  on  this  topic  should  definitely  change  the  qualifications  to  implement  more   companies  in  the  research  and  further  be  able  to  encompass  and  capture  the  stock  price   reactions.  My  research  also  did  not  account  for  factors  such  as  bankruptcy,  company  size,   number  of  shareholders  and  shares  outstanding,  and  some  other  factors  that  might  have   affected  the  results  of  my  data.       My  hypothesis  was  proven  wrong,  as  my  results  concluded  that  the  implementation  
  24. 24.   24   of  Sarbanes-­‐Oxley  2002  did  not  affect  the  stock  price  reactions.  It  also  concluded  that  non-­‐ class  action  lawsuits  experienced  a  larger  negative  stock  effect  than  class  action  lawsuits,   which  is  completely  opposite  of  what  I  would  argue.  An  analysis  of  my  research  suggests   that  companies  may  not  experience  as  large  of  punitive  damages  from  stockholders  than   one  might  think.  I  plan  to  extend  my  study  in  the  future  to  research  some  of  the  factors  that   may  have  affected  my  study.  I  would  also  encourage  companies  to  study  these  results  in   hopes  of  implementing  a  stronger  policy  to  help  filter  out  and  detect  fraud.  Undetected   fraud  might  be  the  biggest  secret  in  the  corporate  world,  and  it  would  be  my  hope  that   significant  research  be  published  in  arguing  that  companies  do  suffer  through  stock  price   reactions  as  a  direct  result  of  accounting  fraud.    
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  26. 26.   26   Murphy, Deborah L., Ronald E. Shreives, and Samuel L. Tibbs. "Understanding the Penalties Associated with Corporate Misconduct: An Empirical Examination of Earnings and Risk." Journal of Financial and Quantitative Anaysis 44.1 (2009): 55-83. "Navigating the Sarbanes-Oxley Act of 2002." PricewaterhouseCoopers, Mar. 2003. Web. 23 Feb. 2012. <http://tech.uh.edu/faculty/conklin/IS7033Web/7033/Week13/SO_Overview_Final.pdf>. Obringer, Lee A. "How Lawsuits Work." HowStuffWorks. A Discovery Company. Web. 28 Feb. 2012. <http://people.howstuffworks.com/lawsuit.htm>. "Rule 23. Class Actions." LII. Cornell University Law School. Web. 12 Nov. 2011. <http://www.law.cornell.edu/rules/frcp/rule_23>. Spurzem, Bob. "Sarbanes-Oxley Act (SOX)." Search CIO. Web. 22 Feb. 2012. <http://searchcio.techtarget.com/definition/Sarbanes-Oxley-Act>. "Timeline and Passage of Sarbanes-Oxley." Digital Pathways. Web. 28 Nov. 2011. <http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CDIQFjAA& url=http%3A%2F%2Fwww.digpath.co.uk%2Fcompliance%2Fsarbannes-oxley- sox%2Ftimeline-and-passage-of- sarbanesoxley.html&ei=5p1KT9u3MtSJtwf08LHvAg&usg=AFQjCNGzVEYcGm2s9g2o4G9tw _0llrQ1iA&sig2=WvNCDI-oKyIMePg6FkcjEw>. "Top 10 Class-Action Lawsuits." American Greed. CNBC, 10 Apr. 2010. Web. 23 Feb. 2012. <http://www.cnbc.com/id/35988343/Top_10_Class_Action_Lawsuits?slide=10>. "WorldCom Company Timeline." The Washington Post. The Washington Post, 15 Mar. 2005. Web. 23 Feb. 2012. <http://www.washingtonpost.com/wp-dyn/articles/A49156-2002Jun26.html>.

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