Can a securities law improve investor rationality in processing earnings information?

Abstract

In this paper, I propose a general hypothesis that after the enactment of the Sarbanes-Oxley Act (SOA) financial statements convey more accurate and reliable corporate information to investors who in turn reect such improvements in stock prices and test four practical hypotheses that simultaneously feature the degree of information asymmetry, forecast bias, and investor reaction to biased earnings information. The empirical results unanimously suggest that the post-SOA investors take advantage of the improvement in informational efficiency and accuracy and actively adjust for analyst forecast bias in earnings forecasts. The SOA indeed appears to achieve its primary goal of investor protection.