The Effect of SOX Section 404: Costs, Earnings Quality, and Stock Prices



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    • Peter Iliev is at the Smeal College of Business, Pennsylvania State University. I would like to thank Ivo Welch, Ross Levine, Campbell Harvey (the editor), two anonymous referees, an anonymous associate editor, Laura Field, Jean Hewlege, Michelle Lowry, Josh Lerner, Svetla Vitanova, and the participants at seminars at Brown University, Columbia, Georgetown, London Business School, Pennsylvania State University, the Securities and Exchange Commission, University of Florida, University of North Carolina, University of Oregon, Yale, and the Harvard University EC2727 class discussion for their helpful comments.


This paper exploits a natural quasi-experiment to isolate the effects that were uniquely due to the Sarbanes–Oxley Act (SOX): U.S. firms with a public float under $75 million could delay Section 404 compliance, and foreign firms under $700 million could delay the auditor's attestation requirement. As designed, Section 404 led to conservative reported earnings, but also imposed real costs. On net, SOX compliance reduced the market value of small firms.