thesis_effects of material weakness on stock exchange market

School of Business Administration

EFFECTS OF MATERIAL

WEAKNESS ON STOCK EXCHANGE

MARKET

The impact of Sarbanes Oxley Act in companies’ share price

Ronnie Damonte

Month Year

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TABLE OF CONTENTS:

1. INTRODUCTION ..................................................................................................................................... 3

1.1 BACKGROUND INFORMATION. .................................................................................................................................. 3

1.2 OBJECTIVES OF THE RESEARCH. ................................................................................................................................ 3

1.2 RESEARCH QUESTIONS. ............................................................................................................................................ 4

1.3 METHODS. ............................................................................................................................................................... 4

2. SARBANES OXLEY ACT........................................................................................................................ 5

2.1 WHAT IS THE “SARBANES OXLEY ACT”? .................................................................................................................. 5

2.2 SOX GENESIS. .......................................................................................................................................................... 5

2.2.1 Toward the SOX. ............................................................................................................................................ 5

2.2.2 The development of SOX bill. ......................................................................................................................... 6

2.3 STRUCTURE AND CONTENTS OF SARBANES OXLEY ACT. ........................................................................................... 8

2.3.1 - 100s Public Company Accounting Oversight Board. .................................................................................. 8

2.3.2 - 200s Auditor Independence. ......................................................................................................................... 8

2.3.3 – 300s Behavior and Compensation of CEO, CFO and professional advisors. ............................................. 9

2.3.4 – 400s Disclosure Rules. .............................................................................................................................. 11

2.3.5 – 500s Conflicts of Analyst Interest. ............................................................................................................. 12

2.3.6 – 600s Funding; 800, 900, 1100s Disciplining Transgressors. .................................................................... 13

2.4 SOX SECTION 404. ................................................................................................................................................ 13

2.4.1 Overview of Section 404. .............................................................................................................................. 13

2.4.2 Internal Auditor Role in Section 404. ........................................................................................................... 14

2.4.3 Definition of deficiencies in internal control system..................................................................................... 15

2.5 MARKET REACTIONS AFTER SOX. .......................................................................................................................... 16

3. IMPLEMENTATION OF THE RESEARCH ...................................................................................... 18

3.1 SELECTION OF THE STUDY SAMPLE. ......................................................................................................................... 18

3.2 RESEARCH METHODOLOGY. .................................................................................................................................... 21

3.2.1 Average variation analysis. .......................................................................................................................... 21

3.2.2 Gaussian distribution analysis. .................................................................................................................... 22

4. EMPIRICAL TEST AND RESULTS .................................................................................................... 27

4.1 INTRODUCTION. ...................................................................................................................................................... 27

4.2 RESULTS OF THE AVERAGE VARIATION ANALYSIS. ................................................................................................... 28

4.2.1 Calculation of the company stock trend. ...................................................................................................... 28

4.2.3 Calculation of the average variation. ........................................................................................................... 29

4.3 RESULTS OF THE GAUSSIAN DISTRIBUTION ANALYSIS FOR THE ENTIRE SAMPLE. ....................................................... 32

4.4 RESULTS OF THE GAUSSIAN DISTRIBUTION ANALYSIS APPLIED TO THE TYPE OF INDUSTRY. ...................................... 35

4.4.1 Automotive and transport. ............................................................................................................................ 35

4.4.2 Construction. ................................................................................................................................................ 36

4.4.3 Consumer product manufacturers. ............................................................................................................... 37

4.4.4 Consumer services. ....................................................................................................................................... 38

4.4.5 Electronics. ................................................................................................................................................... 39

4.4.6 Energy and utilities....................................................................................................................................... 40

4.4.7 Financial services. ........................................................................................................................................ 41

4.4.8 Industrial manufacturing. ............................................................................................................................. 42

4.4.9 Media. ........................................................................................................................................................... 43

4.4.10 Pharmaceutical. ......................................................................................................................................... 44

4.5 RESULTS OF THE GAUSSIAN DISTRIBUTION ANALYSIS APPLIED TO THE COMPANY SIZE. ............................................ 45

4.5.1 Small size companies. ................................................................................................................................... 46

4.5.2 Medium size companies. ............................................................................................................................... 46

4.5.3 Large size companies. .................................................................................................................................. 48

5. CONCLUSIONS ...................................................................................................................................... 50

REFERENCES ............................................................................................................................................ 52

APPENDICES .............................................................................................................................................. 56

APPENDIX 1: SHARE PRICE ANALYSIS PER EACH SELECTED COMPANY OVER A PERIOD OF SIX MONTHS............................ 56

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1. INTRODUCTION

1.1 Background Information.

In recent years Sarbanes Oxley Act (the Act or SOX hereafter), a corporate law of United

States has brought significant changes in the governance, accounting, auditing, and

reporting environment of firms traded in American securities markets.

Under the new regime of SOX, public companies must have a system of internal controls,

management must make disclosures and attestations about the internal controls, and the

external auditors must also test and evaluate the system. Important internal control

deficiencies, called technically material weakness, could lead the auditor to conclude that

internal control over financial reporting is not effective.

In my role of Senior Consultant in Deloitte Touche Tohmatsu, my employer has asked me

to implement a research in order to understand the effect on market share price of

material weakness. In fact, negative market reactions could lead some companies to apply

a delisting program, decreasing the business opportunities regarding SOX consulting and

auditing prospective for Deloitte Touche Tohmatsu.

1.2 Objectives of the Research.

In an attempt to increase investor confidence in financial reporting, the Sarbanes Oxley

Act mandates management evaluation and independent audits of internal control

effectiveness. Motivated by the ongoing debate on the economic impact and

consequences of SOX, this paper investigates the effects of the Act in the Stock Exchange

Market, by examining market reactions to the disclosures of a material weakness during

the evaluation of company internal control system.

We use SOX 404 audit opinions to assess how announcements of a material control

weakness affect the stock price of the listed firms.

In order to achieve these objectives other goals have been set for the thesis:

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to outline the structure and the contents of Sarbanes-Oxley Act;

to provide Deloitte information that can be used to broaden the knowledge about one

of the major business area of the company.

The introduction chapter of this paper presents next the research questions, the methods

of the research and then an overview of Deloitte. The second chapter is concentrated on

the Sarbanes-Oxley Act evolution, composition and theoretical framework. The third

chapter presents the empirical research process and finally, the fourth chapter contains the

results of the research and provides the analysis of the selected data.

1.2 Research Questions.

The main research question of this bachelor's thesis is:

How does a material weakness affect company share price?

This main question is followed by two sub questions:

What are the differences between material weaknesses effects originating from

companies having diverse sizes?

In which way the market reaction is influenced by the type of industry?

1.3 Methods.

This is an inductive research where quantitative methods have been used. The

quantitative analysis consists of stock price data acquired from the New York Stock

Exchange and the results of audit regarding company's internal control over financial

reporting required by the Sarbanes Oxley Act.

Statistical results of the data analysis have been received by using the Gauss curve, as

preferred distribution function, and the Excel spreadsheet, as tool of testing.

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2. SARBANES OXLEY ACT

2.1 What is the “Sarbanes Oxley Act”?

In response to the collapse of a number of high-profile firms since late 2001, Congress

passed the Sarbanes-Oxley Act (the Act or SOX hereafter) in July 2002 to enhance

corporate governance and thereby restore public confidence. The Act has introduced

significant changes in both management‟s reporting responsibilities and the scope and

nature of the responsibilities of the auditor.

The major provisions of the Act established the Public Company Accounting Oversight

Board (PCAOB), prohibit auditors from performing certain non-audit services for their

audit clients, impose greater criminal penalties for corporate fraud, and call for more

detailed and timely disclosure of financial information. Further, Section 404 of the Act

requires that management assess internal controls and that auditors report on the internal

controls of their clients. By requiring deeper oversight, imposing greater penalties for

misconduct, and dealing with potential conflicts of interest, the Act aims to prevent

deceptive accounting and management misbehavior.

2.2 SOX genesis.

2.2.1 Toward the SOX.

In early 2000, the American stock markets crashed, after a long boom period during the

1990s. Stock prices continued to be low for several years, until recovery began in 2003.

During the period of depressed prices, scandals emerged. Some of the companies that had

seen high-flying stock prices, but were now in bankruptcy, or at least in serious financial

trouble, were discovered to have been boosted artificially by major accounting frauds or

manipulations that persisted for remarkable time periods (e.g., Enron, WorldCom). Others

were found to be financially weaker than previously perceived because, among other

things, their executives had engaged in major self-dealing transactions or extractions of

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personal benefits (e.g., Tyco, Adelphia). As the facts were uncovered, journalists

publicized them in a vivid and persistent way.

The situation was really problematic, since the trust of investors in the Corporate

American Market started to fall. To avoid an outflow of capital the Congress, the

Securities and Exchange Commission (hereafter, SEC), and the Bush Administration

worked side by side to produce major changes in corporate governance standards

applicable to U.S. corporations.

The transformation process evolved through three major phases:

1. The federal Sarbanes-Oxley Act of 2002, which enacted sweeping governance

changes and called for the SEC to adopt implementing rules and procedures on

corporate governance and responsibility.

2. The new listing requirements for publicly traded companies governed by the New

York Stock Exchange (NYSE), which impose new Corporate Governance Rules.

3. The utilization of increasingly detailed and stringent corporate governance rating

systems devised by private governance rating agencies (e.g.: “Corporate

Governance Quotient” system used by Institutional Shareholder Services, or the

“Board Effectiveness Ratings” system).

This chapter analyses the structure and the requirements of SOX only. However, it is

important to understand the legislative and economic environment, which constitute both

the reasons and the framework of SOX development.

2.2.2 The development of SOX bill.

After the scandals that started to occurs in Corporate America, the first signal of a

regulatory overhaul was reported on January 16, 2002 (Day et al., January 16, 2002,

Washington Post): SEC Chairman Pitt would announce a reform plan to create an

independent regulatory organization. Legislative activities progressed slowly from

February to May 2002. The Bush Administration unveiled their response to the Enron

scandal in February and March, while Congress moved ahead with several proposals

towards accounting reforms. Republican Rep. Oxley‟s reform bill, which was introduced

in the House on February 13, was considered a business-friendly reform proposal

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(Schroeder, February 12, 2002, Wall Street Journal). Meanwhile, Democratic Senators

reportedly drafted bills that went beyond Oxley‟s bill (Schroeder, March 7, 2002 and

April 23, 2002, Wall Street Journal).

Although Sen. Sarbanes‟ tough reform bill passed in the Senate Banking Committee on

June 18, it was not expected to have much chance of becoming law at that time

(Hilzenrath et al., July 28, 2002, Washington Post). However, the exposure of the

WorldCom scandal in late June boosted rulemaking activities (Hamburger et al., June 27,

2002, Wall Street Journal).

The Senate started debate on July 8, and Sarbanes‟ bill was passed 97 to 0 in the Senate

on July 15 (Hilzenrath et al., July 16, 2002, Washington Post).

The House and Senate formed a conference committee and started final negotiations to

merge the bills on Friday, July 19 (Hilzenrath, July 20, 2002, Washington Post). The final

rule was agreed upon on July 24 (VandeHei et al., July 25, 2002, Washington Post),

passed in Congress on July 25, and signed into law on July 30 (Hitt, July 31, 2002, Wall

Street Journal).

The implementation of SOX started soon after its passage. August 14, 2002 was the first

deadline for CEOs and CFOs of the 947 largest firms, called accelerated filers, to certify

the truthfulness of their financial reports (Day et al., August 15, 2002, Washington Post).

As directed by SOX, the SEC started rulemaking activities as of late August 2002.

The rulemaking activities directed by SOX continued in 2003. The SEC proposed listing

standards on January 8 (Schroeder, January 9, 2003, Wall Street Journal) and adopted a

series of rules in mid-January. The SEC adopted rules concerning management reports on

internal controls on May 27, adjusting the compliance date from September 2003 in the

original proposal to July 2004 for accelerated filers and April 2005 for non-accelerated

filers (Solomon, May 28, 2003, Wall Street Journal). On October 7, 2003, the PCAOB

proposed a standard on the audit of internal controls, as required by Section 404 of SOX

(Bryan-Low, October 8, 2003, Wall Street Journal). The standard was adopted in March

2004 and approved by the SEC in June, which completed the major rulemaking activities

directed by SOX.

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2.3 Structure and contents of Sarbanes Oxley Act.

The SOX is composed by the following sections:

100s Creation and Operation of the Public Company Accounting Oversight Board

200s Auditor independence

300s Behaviour and compensation of CEO, CFO and professional advisors

400s Disclosure rules

500s Conflicts of analyst interest

600s Funding and power of the SEC

800,900,1100s Penalties for transgression

This paragraph discusses and analyses each section of the Act, in order to provide a

complete understanding of this complex law.

2.3.1 - 100s Public Company Accounting Oversight Board.

Section 101 of the Act creates the Public Company Accounting Oversight Board, a not-

for-profit organization that verifies the correct application and implementation of SOX

rules. The Board consists of five members who serve for five year staggered terms.

Only firms that have registered with the Board are able to audit publicly-quoted

companies. This gives the Board new and significant monopoly powers. It is also

responsible for creating, promulgating and monitoring standards of auditing and of ethical

behavior. The Board is overseen by the SEC and is funded from audit fees (Guy P.

Lander, 2004, What is Sarbanes-Oxley?).

2.3.2 - 200s Auditor Independence.

Section 201 of the Act has caused major changes to the industrial organization of

professional services firms in the United States, and consequently in the whole world.

Therefore international non-American corporations listed on the NYSE have to follow the

SOX rules, which are in fact applied to all the listed companies. Section 201 prohibits

audit firms from also providing non-audit services to audit clients. These include

bookkeeping, financial information systems design, actuarial services, investment advice

or dealing, legal and expert services. Hence, in general, cross-selling of consultancy

services is outlawed.

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The Act also discusses the relationship between the auditing firm and the client. In

particular Section 203 underlines that reviewing partners must be circulated after five

years. Finally, a firm cannot be audited by an institution which in the previous year

employed either the CEO or senior accounting officers upon an audit of the firm (Protiviti

Inc., 2003, Guide to the Sarbanes-Oxley Act: Internal Control Reporting Requirements).

These rules are specifically intended to avoid possible conflicts of interest. Their aim is to

reassure investors that disclosed figures are unbiased. Some industry participants have

however expressed concern that the rules may close important information transmission

channels. For example, changing audit partners may cause a loss of valuable expertise

which could serve to improve oversight, rather than to weaken it. Similarly, if the audit

firm has the best information about a corporation‟s requirements for financial information

then it may be inefficient to prevent it from selling its expertise in the form of IT

consultancy

2.3.3 – 300s Behavior and Compensation of CEO, CFO and professional advisors.

The sections of the Sarbanes-Oxley Act numbered 300 represent possibly the most

substantial shifts in US Federal corporate governance law away from disclosure and

towards detailed conduct of business regulation. The sections which will be discussed

have a significant impact upon the organization of the company (301), the job

descriptions of its senior officers (302), their compensation (304) and the relationship of

the firm to its legal advisors (307).

Section 301 requires US securities exchanges to prevent an issuer from listing, if it does

not have an independent audit committee, which is directly responsible for selecting,

hiring and managing the relationship with any public accounting firms employed by the

firm. In addition, the audit committee must establish procedures for dealing with

complaints, and must have wide authority to engage its own professional advisors. Thus,

this part of the Act stipulates the way in which the firm must be organized.

Some concern has been expressed amongst legal scholars about the fact that it may be

impossible for some non-US firms both to meet the requirement for an independent audit

committee and to satisfy local requirements. For example, in German firms the audit

committee‟s role is generally performed by the supervisory board, the Vorstand, which

does not meet the requirements of section 301. In order to solve this issue, foreign firms

are not required to comply with this part of the legislation since July 31, 2005.

http://skillport.books24x7.com/book/id_6104/toc.asp

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Section 302 of the Act has received possibly more press attention than any other part of

the Act. It requires the CEO and CFO to certify financial and other information contained

in each annual and quarterly report. They have responsibility for establishing and

maintaining internal controls and they are required to ensure that they receive reports of

all material information. Furthermore, they are under an obligation to disclose to the audit

committee any deficiencies they uncover in the design or operation of internal controls,

along with details of intended corrective action (Robert A Prentice, 2004, Guide to the

Sarbanes-Oxley Act: What Business Needs to Know Now That it is Implemented).

In prescribing the reports that the CEO and CFO will and in defining precisely some of

their job responsibilities, section 302 again moves significantly from the former emphasis

in US law upon disclosure requirements. It has been criticized on the grounds that the

CEO and CFO are already responsible for internal controls and for the accuracy of

financial information. However, it may be difficult for a CEO to commit to examine

internal controls in the absence of a clear auditing requirement or of legal machinery for

dealing with transgressions. Equally, this legislation makes it easier for the CFO to

commit never to use ignorance as an excuse: while ex post this excuse may be acceptable

to both the company officers and to the investors, it is never ex ante efficient (Anne M.

Marchetti, 2005, Beyond Sarbanes-Oxley Compliance: Effective Enterprise Risk

Management).

Section 304 is a rare example in the US of State interference with compensation policies.

It requires the corporation‟s CEO and CFO to reimburse any equity-based compensation

or profits from stock sales following a required restatement of a financial document as a

result of material noncompliance of the issuer due to misconduct with any financial

reporting requirement under securities laws.

In practice the section 304 seems likely simply to raise the costs of employing senior

corporate officers, both directly because of the danger of confiscation of compensation,

and indirectly, because the replacing stock options with cash payments will undermine

managerial incentives (Cohen, Daniel A., Aiyesha Dey, and Thomas Z. Lys, 2005, Trends

in earnings management and informativeness of earnings announcements in the pre- and

post-Sarbanes Oxley periods, Working paper, New York University).

Section 307 undermines the confidentiality of the firm-lawyer relationship. It requires the

firm‟s lawyers to report evidence of material breaches of securities laws or of fiduciary

duty to the firm‟s chief legal officer and to its CEO. If they do not respond with sufficient



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speed, the breach must be reported to the audit committee or to the full board of directors.

There has been quite a bit of criticism of this law, some of it from lawyers. It has been

suggested that corporate officers may be unwilling to ask for advice if they think that in

doing so they may reveal a problem which will then become public knowledge with

potentially harmful effects for the officers involved. This may of course be a problem. At

the same time, this is a classic example of a rule which in the absence of legal strictures

neither the law firm nor the firm would be able to commit ex ante. So introducing this law

may help to increase the value of the corporations which are subject to it. Some authors

think that it is almost impossible to tell a priori whether this is the case. As it was

introduced with an extremely wide-ranging raft of other laws, it is probably impossible to

disentangle its effects from the rest of the legislation (Guy P. Lander, 2004, What is

Sarbanes-Oxley?).

2.3.4 – 400s Disclosure Rules.

Some straightforward changes have been made to disclosure requirements with respect to

off-balance sheet transactions, and to insider transactions. The Act also requires firms to

disclose whether their audit committee contains a financial expert. This part of the Act

also imposes some conduct of business obligations. For example, section 402 prohibits

listed companies from making loans to executive officers or directors.

Section 406 requires companies to disclose a written code of ethics, or to explain why

they do not have one. This reflects an increasing tendency towards notions of corporate

social responsibility. In the wake of scandals like the Enron affair, it has received little

real critical attention, but it is nevertheless an interesting step. Many commentators have

argued that attempting to endow corporations with moral responsibilities risks subverting

their real purpose of wealth creation. In practice, the ethical requirements of the Sarbanes-

Oxley Act relate mostly to compliance with the law and to the management of conflicts of

interest so this part of the Act appears unlikely to be an immediate cause of disputes

(Scott Green, 2004, Sarbanes-Oxley and the Board of Directors: Techniques and Best

Practices for Corporate Governance).

Sections 404 will constitute much of the remainder of this chapter, so I will outline briefly

it now before returning later to its implications. Its main point of interest is represented by

the fact that it requires an annual internal control report containing a statement of the

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responsibility of management for establishing and maintaining adequate control of

financial reporting.

Section 409 has received perhaps less attention than 404, but its impact may in the longer

term be fundamental. It requires quoted companies to disclose to the public in plain

English and on a “rapid and current basis” any information concerning material changes

in the financial condition of the company‟s operations. It appears that the initial

requirement for a 48 hour reporting horizon has been supplanted by a four business day

requirement.

Like section 404, section 409 is simply a disclosure requirement: compliance methods

and their structural implications are left to the regulated firm. Nevertheless, and

notwithstanding the extension of the reporting deadline, section 409 is likely to have

major repercussions for regulated companies, particularly if detailed reporting standards

are introduced. Like section 409, it requires quantative and verifiable information on

company procedures, and it forces firms to make a rapid decision about the likely impact

of changes to standard conditions. Although financial markets appear on average to be

pretty good at aggregating information, one obvious concern is that frequent company

announcements of potentially deleterious events will destabilize the stock price. This area

of study will be analyzed in the following chapters.

More immediately, section 409 requires the implementation of real-time monitoring

systems. In brief, though, corporations have to capture important operational information

and establish procedures for responding to it. As with section 404, this introduces

organizational complications. The obligation to maintain near real-time information on

decision-making within the firm and systemic shocks outside requires both a clear

understanding of the firm‟s organizational structure and of the consequences of

exogenous shocks such as supplier failure or severe weather. At the very least careful

mapping of organizational form will be required; conceivably, that this requirement can

most efficiently be met if the corporation is somewhat restructured (Michael F. Holt,

2006, The Sarbanes-Oxley Act: Overview and Implementation Procedures Manual).

2.3.5 – 500s Conflicts of Analyst Interest.

During the stock market boom of the 90‟s there were some instances where it appeared

that stock market analysts had overstated the value of some corporations in order to

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secure valuable corporate finance advisory business for their employers. This type of

cross-selling is potentially more damaging to the efficient operation of the capital markets

than that by auditors to their consultancy divisions. Sarbanes-Oxley‟s section 501

contains provisions which force securities exchanges to adopt rules in order to deal with

the problem.

For example, analysts are no longer allowed to submit their reports to the subject

companies for clearance; retaliation for bad reports is prohibited; and better information

partitions are mandated.

Some commentators have expressed muted opposition to the changes on the grounds that

they will undermine information gathering incentives in financial markets. Their longer

term effect has yet to be determined, but SOX experts consider overall results as positive

(Robert Charles Clark, 2005, Corporate governance changes in the wake if the Sarbanes

Oxley Act, Discussion Paper, University of Harvard).

2.3.6 – 600s Funding; 800, 900, 1100s Disciplining Transgressors.

The remainder of the Act provides for the enhanced funding which the SEC requires

(section 601) and gives the legislation teeth. For example, section 802 stipulates a 20 year

penalty for destruction, alteration of falsification of records in Federal investigations and

bankruptcy; section 807 raises the criminal penalty for securities law to 25 years

imprisonment, and section 906 institutes a $1,000,000 fine or 10 years‟ imprisonment for

CEOs and CFOs who knowingly give false certification of compliance with the Act (Alan

D. Morrison, 2004, Sarbanes Oxley, Corporate Governance and Operational Risk,

Sarbanes-Oxford Seminar, University of Oxford).

2.4 SOX Section 404.

2.4.1 Overview of Section 404.

Section 404 is one of the most important parts of SOX. It requires management to include

an internal control report in its annual report that:

States the responsibility of management for establishing and maintaining an adequate

internal control structure and procedures for financial reporting;

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Contains an assessment, as of the end of the most recent fiscal year, of the

effectiveness of the internal control structure and procedures of the company for


The auditor is required to attest to the accuracy of these statements, that is referred to as

the audit of internal control over financial reporting.

Thus, the requirements of section 404 place new and possibly costly demands upon

regulated companies. In particular, they imply the existence of a formal and verifiable

system of checking internal controls.

In many firms controls are essentially built into formal and informal communication

channels and it can be difficult to codify them. This process of formalization is

complicated by the need to provide audit trails.

So, it is not only necessary to write down the corporation‟s control mechanisms: it is also

compulsory to prove that they have been employed. It is possible that in some firms

compliance is achieved only by changing significantly the corporation‟s reporting lines

(KPMG LLP, 2004. Sarbanes-Oxley Section 404: An overview of the PCAOB’s

requirements).

2.4.2 Internal Auditor Role in Section 404.

The auditor's role defined by Section 404 of the Act is to express an opinion on

management's assessment of the effectiveness of the company's internal control over


To form a basis for state such an opinion, the auditor must plan and perform the audit to

obtain reasonable assurance about whether the company maintained effective internal

control over financial reporting as of the date specified in management's assessment.

For the auditor to satisfactorily complete an audit of internal control over financial

reporting, management must fulfill the following important duties:

Accepting responsibility for the effectiveness of the company‟s internal control

system;

Evaluating the effectiveness of the company‟s internal control system using suitable

control criteria;

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Supporting the evaluation with sufficient evidence, including adequate

documentation;

Presenting a written assessment of the effectiveness of the company‟s internal control

system as of the end of the most recent fiscal year.

Management fulfills these responsibilities by undertaking a comprehensive approach that

includes thorough planning and evaluation of its system of internal controls (Financial

Reporting Council, 2004, The Turnbull guidance as an evaluation framework for

the purposes of Section 404(a) of the Sarbanes-Oxley Act).

2.4.3 Definition of deficiencies in internal control system.

The audit of the company's internal control over financial reporting can present three

types of deficiencies, which affect in different ways the auditor‟s evaluation:

Control Deficiency.

A control deficiency exists when the design or operation of a control does not allow

management or employees, in the normal course of performing their assigned

functions, to prevent or detect misstatements on a timely basis (Financial Accounting

Standards Board Statement No. 5, Accounting for Contingencies ("FAS No. 5").

Significant Deficiency.

A significant deficiency is a control deficiency, or combination of control

deficiencies, that adversely affects the company's ability to initiate, authorize, record,

process, or report external financial data reliably in accordance with generally

accepted accounting principles such that there is more than a remote likelihood that a

misstatement of the company's annual or interim financial statements that is more than

inconsequential will not be prevented or detected (Financial Accounting Standards

Board Statement No. 5, Accounting for Contingencies ("FAS No. 5").

Material Weakness.

A material weakness is a significant deficiency, or combination of significant

deficiencies, that results in more than a remote likelihood that a material misstatement

of the annual or interim financial statements will not be prevented or detected.

(Paragraph 3 of FAS No. 5).

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As explained in the previous paragraph, the company‟s auditor is required to attest

management‟s assessment and also report its own conclusion regarding the effectiveness

of the company‟s internal control over financial reporting. Maintaining effective internal

control over financial reporting means that no material weaknesses exist. For this reason

the objective of the audit of internal control over financial reporting is to obtain

reasonable assurance that no material weaknesses exist as of the date specified in

management's assessment.

The existence of one or more material weaknesses will require management and the

auditor to conclude that internal control over financial reporting is not effective.

Such a conclusion, however, will not result in any sanctions or penalties from the SEC,

provided the auditor issues an unqualified opinion on the financial statements, but the

shareholders reactions can lead to have deep negative effects in the stock price of the

company.

2.5 Market reactions after SOX.

Ever since the passage of the Act, the business community has expressed substantial

concerns for its costs of compliance.

An August 2003 survey of executives by CFO Magazine indicated that 70% of the

respondents did not believe the benefits of compliance justify its costs (CFO Magazine,

2003). Moreover, Financial Executives International (FEI) surveyed 224 public firms in

July 2004 about the direct costs of complying with Section 404 of SOX. The survey finds

that the average first-year cost estimate is almost $3 million for roughly 26,000 hours of

internal work and 5,000 hours of external work, plus additional audit fees of $823,200, or

an increase of 53% (Financial Executive International (FEI), 2004. Section 404 costs

survey).

In addition, the Act exposes executives to greater litigation risks and possible penalties.

As a result, CEOs are likely to take less risky actions, consequently changing their

business strategies and potentially reducing the value of their firms (Wallison, September

2005, Wall Street Journal).

For many experts of SOX, the lack of flexibility outlined by the Act could be far more

detrimental to the vast majority of firms than a few scandals. Further, the passage of SOX

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gives rise to a broader concern that SOX could signal a shift to more rigid federal

regulation and legislation of corporate America. Such a shift would likely reduce the

flexibility of the current governance systems and business environment, causing extensive

changes in the economy (Holmstrom, B. and S. Kaplan, 2003. The state of U.S. Corporate

governance: What’s right and what’s wrong? Journal of Applied Corporate Finance).

A PricewaterhouseCoopers survey of CEOs at the World Economic Forum in 2005 finds

that 59% of the respondents currently view the risk of overregulation as one of the biggest

threats to the growth of their firms (Norris., January 2005, New York Times).

The economic significance of the Sarbanes-Oxley Act has been widely acknowledged and

is considered comparable only to that of the Securities Acts of 1933 and 1934 (Li, H., M.

Pincus, and S. Rego, 2004. Market reaction to events surrounding the Sarbanes-Oxley

Act of 2002. Working paper, University of Iowa).

Thus, it is important to understand how this Act affects businesses and how the market

interprets the information conveyed by the passage of the Act.

This paper extends the event study literature by examining changes in stock prices in

response to announcements that affect the internal control system of the listed firms.

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3. IMPLEMENTATION OF THE RESEARCH

3.1 Selection of the study sample.

The initial population of firms providing internal control deficiencies disclosures is

obtained from compilations of SEC filings reported in “Compliance Week”, a weekly

electronic newsletter published by Boston‟s Financial Media Holdings Group (source:

www.complianceweek.com).

The sample period spans filings made from January 2006 to September 2006. In addition,

I supplement this database with additional hand collected data from SEC filings (source:

www.pcaob.com).

This results in an initial population of 753 firms disclosing at least one internal control

deficiency in the SOX 404 reporting regimes.

For the sample selection process I utilize two criteria:

1. Total revenues during Fiscal Year 2005.

The figure “Total revenues” represents an excellent measure of company dimension.

The aim of the selection is to provide a complete view of market, starting from

relatively small companies, as Hemispherx Biopharma Inc. (1.1 million dollars of

revenues), to truly global players, as General Motors Corporation (192.604 million

dollars of revenues).

2. Type of industry,

One of the sub questions of this thesis is to understand in which way the market

reaction caused by an announcement of a material control weakness is influenced by

the type of industry. In order to answer this question I have decided to examine

companies that operate in the following industries:

Automotive & Transportation;

Construction;

Consumer Products Manufacturers;

19

Consumer Services;

Electronics;

Energy & Utilities;

Financial Services;

Industrial Manufacturing.

Media.

Of the 753 firms, I selected 77 firms that have the necessary characteristics to be included

in the stock value change analysis.

Table 1 reports the sample of companies used in empirical tests and comprises detailed

information concerning the following matters:

Revenues during fiscal year 2005 ;

Stock exchange market (NYSE, Nasdaq and AMEX);

Type of industry;

Effectiveness of disclosure controls and procedures;

Effectiveness of internal control over financial reporting;

Date of announcement;

Type of weaknesses (control environment, inadequate training and staffing, financial

procedures, lease accounting, taxes, cash-flow, revenue recognition, hedges,

information technology, vendor contracts and documentation).

20

Table 1: Companies selected for the research: Detailed Information.

Material Weaknesses In Internal Control Over Financial Reporting - Company List

FY '05 Rev.

Company Exch. Ticker Industry (in millions)

ABM INDUSTRIES INC NYSE ABM Electronics $2.587,8 Not Effective Not Effective 03/28/06 12/31/05 X X X

AES CORP NYSE AES Energy & Utilities $11.086,0 Not Effective Not Effective 04/03/06 12/31/04 X X X X X X

AIRTRAN HOLDINGS INC NYSE AAI Automotive & Transport $1.450,5 Not Effective Not Effective 03/09/06 12/31/05 X

ALLION HEALTHCARE INC Nasdaq ALLI Pharmaceuticals $123,1 Not Effective Not Effective 04/18/06 12/31/05 X

AMERICA SERVICE GROUP INC NASDAQ ASGR Pharmaceuticals $562,7 Not Effective Not Effective 04/03/06 12/31/05 X

BANK OF AMERICA CORP NYSE BAC Financial Services $83.980,0 Not Effective Not Effective 03/16/06 09/30/05 X

BELL INDUSTRIES INC AMEX BI Electronics $130,9 Not Effective Not Effective 04/16/06 12/31/05 X

BIOSCRIP, INC. NASDAQ BIOS Financial Services $1.073,2 Not Effective Not Effective 03/31/06 12/31/05 X X X X X X

BOWNE & CO INC NYSE BNE Financial Services $694,1 Not Effective Not Effective 05/09/06 12/31/05 X X

BRADLEY PHARMACEUTICALS INC NYSE BDY Pharmaceuticals $133,4 Not Effective Not Effective 05/18/06 12/31/05 X X

CACHE INC NASDAQ CACH Consumer Services $266,3 Not Effective Not Effective 03/21/06 12/31/05 X

CAPITAL SENIOR LIVING CORP NYSE CSU Pharmaceuticals $105,2 Not Effective Not Effective 03/31/06 12/31/05 X

CASTLE A M & CO AMEX CAS Industrial Manufacturing $959,0 Not Effective Not Effective 03/31/06 12/31/05

CDI CORP NYSE CDI Financial Services $1.133,6 Not Effective Not Effective 03/16/06 12/31/05 X

CERIDIAN CORP NYSE CEN Financial Services $1.459,0 Not Effective Not Effective 03/16/06 12/31/05 X

CHESAPEAKE CORP NYSE CSK Industrial Manufacturing $1.042,0 Not Effective Not Effective 03/10/06 01/01/06 X

CHICAGO BRIDGE & IRON CO N V NYSE CBI Construction $2.257,5 Not Effective Not Effective 05/31/06 12/31/05 X X

CNA FINANCIAL CORP NYSE CNA Financial Services $9.862,0 Not Effective Not Effective 03/08/06 12/31/05 X X X

CORNING INC NYSE GLW Financial Services $4.579,0 Not Effective Not Effective 05/08/06 12/31/05 X

CROSS A T CO AMEX PRZ Consumer Products Manufacturers $129,1 Not Effective Not Effective 03/28/06 12/31/05 X

CROWN MEDIA HOLDINGS INC NASDAQ CRWN Media $197,4 Not Effective Not Effective 03/28/06 12/31/05 X X

CT COMMUNICATIONS INC NASDAQ CTCI Electronics $171,7 Not Effective Not Effective 03/31/06 12/31/05 X X X

DEVCON INTERNATIONAL CORP Nasdaq DEVC Construction $84,9 Not Effective Not Effective 04/16/06 12/31/05 X

DRESSER-RAND GROUP INC. NYSE DRC Industrial Manufacturing $1.208,2 Not Effective Not Effective 04/04/06 12/31/05 X X X X X

DYNEGY INC NYSE DYN Energy & Utilities $2.313,0 Not Effective Not effective 04/30/06 12/31/05 X

EMS TECHNOLOGIES INC NASDAQ ELMG Electronics $310,0 Not Effective Not Effective 04/02/06 12/31/05 X X X

EVCI CAREER COLLEGES HOLDING CORP Nasdaq EVCI Consumer Services $50,7 Not Effective Not Effective 05/14/06 12/31/05 X X X X X

GENERAL GROWTH PROPERTIES INC NYSE GGP Financial Services $3.073,4 Not Effective Not Effective 03/31/06 12/31/05 X X X

GENERAL MOTORS CORP NYSE GM Automotive & Transport $192.604,0 Not Effective Not Effective 03/28/06 12/31/05 X X X X

H&R BLOCK INC NYSE HRB Consumer Services $4.420,0 Not Effective Not Effective 03/31/06 04/30/05 X

HEMISPHERX BIOPHARMA INC AMEX HEM Pharmaceuticals $1,1 Not Effective Not Effective 06/06/06 12/31/05 X

HIGHWOODS PROPERTIES INC NYSE HIW Financial Services $410,7 Not Effective Not Effective 06/05/06 12/31/05 X

HOLLINGER INTERNATIONAL INC NYSE HLR Media $457,9 Not Effective Not Effective 03/31/06 12/31/05 X X X X X

INPUT OUTPUT INC NYSE IO Electronics $368,7 Not Effective Not Effective 04/03/06 12/31/05

KANSAS CITY SOUTHERN NYSE KSU Automotive & Transport $1.352,0 Not Effective Not Effective 04/06/06 12/31/05 X

KROGER CO NYSE KR Consumer Services $56.434,0 Not Effective Not Effective 04/13/06 01/29/05 X

LANDAMERICA FINANCIAL GROUP INC NYSE LFG Financial Services $3.959,6 Not Effective Not Effective 03/09/06 12/31/05 X

LAUREATE EDUCATION, INC. NASDAQ LAUR Consumer services $875,4 Not Effective Not Effective 03/23/06 12/31/05 X X

LEAP WIRELESS INTERNATIONAL INC NASDAQ LEAP Electronics $914,7 Not Effective Not Effective 03/27/06 12/31/05 X X

LENNOX INTERNATIONAL INC NYSE LII Industrial Manufacturing $3.366,2 Not Effective Not Effective 03/16/06 12/31/05

LHC GROUP, INC NASDAQ LHCG Pharmaceuticals $162,5 Not Effective Not Effective 03/31/06 12/31/05 X

LIGAND PHARMACEUTICALS INC NASDAQ LGND Pharmaceuticals $176,6 Not Effective Not Effective 04/03/06 12/31/05 X X X X X

LINN ENERGY, LLC NASDAQ LINE Energy & Utilities $49,7 Not Effective Not Effective 05/30/06 12/31/05 X X X

MAGELLAN HEALTH SERVICES INC NASDAQ MGLN Pharmaceuticals $1.808,0 Not Effective Not Effective 03/08/06 12/31/05 X

MAX RE CAPITAL LTD NASDAQ MXRE Financial Services $1.175,0 Not Effective Not Effective 06/06/06 12/31/05 X

MEADOW VALLEY CORP NASDAQ MVCO Construction $183,9 Not Effective Not Effective 03/30/06 03/02/06 X X

MODTECH HOLDINGS INC NASDAQ MODT Consumer Products Manufacturers $230,3 Not Effective Not Effective 04/03/06 12/31/05 X X X

MOLSON COORS BREWING CO NYSE TAP Consumer Products Manufacturers $5.506,9 Not Effective Not Effective 03/10/06 12/25/05 X X

MOVIE GALLERY INC NASDAQ MOVI Media $1.987,2 Not Effective Not Effective 03/24/06 01/01/06 X X X

MUELLER INDUSTRIES INC NYSE MLI Industrial Manufacturing $1.729,9 Not Effective Not Effective 03/15/06 12/31/05 X X X

NATURAL HEALTH TRENDS CORP Nasdaq BHIP Consumer Products Manufacturers $194,5 Not Effective Not Effective 05/08/06 12/31/05 X X X X X

NAUTILUS, INC. NYSE NLS Consumer Products Manufacturers $631,3 Not Effective Not Effective 03/16/06 12/31/05 X X

OM GROUP INC NYSE OMG Industrial Manufacturing $2.149,6 Not Effective Not Effective 03/09/06 12/31/05 X

ONEOK INC NYSE OKE Energy & Utilities $12.760,2 Not Effective Not Effective 03/13/06 12/31/05 X X

ORCHID CELLMARK INC Nasdaq ORCH Pharmaceuticals $61,6 Not Effective Not Effective 05/23/06 06/30/05 X X X

OVERSTOCK.COM, INC NASDAQ OSTK Financial Services $803,8 Not Effective Not Effective 03/16/06 12/31/05 X

PACIFIC CMA INC AMEX PAM Automotive & Transport $125,0 Not Effective Not Effective 03/31/06 12/31/05 X X

PAXSON COMMUNICATIONS CORP AMEX ION Media $254,2 Not Effective Not Effective 03/22/06 12/31/05 X

PERFICIENT INC NASDAQ PRFT Financial Services $97,0 Not Effective Not Effective 03/31/06 12/31/05 X X

PETROLEUM DEVELOPMENT CORP NASDAQ PETD Energy & Utilities $343,1 Not Effective Not Effective 05/30/06 12/31/05 X X X X X

POPULAR INC NASDAQ BPOP Financial Services $3.451,1 Not Effective Not Effective 03/15/06 12/31/05 X

RETAIL VENTURES INC NYSE RVI Consumer Services $2.739,6 Not Effective Not Effective 04/10/06 01/29/05 X

ROCK OF AGES CORP Nasdaq ROAC Construction $89,5 Not Effective Not Effective 04/17/06 12/31/05 X

RUSS BERRIE & CO INC NYSE RUS Consumer Products Manufacturers $290,2 Not Effective Not Effective 04/18/06 12/31/05 X

SM&A Nasdaq WINS Financial Services $76,7 Not Effective Not Effective 05/15/06 12/31/05 X X

STERLING CONSTRUCTION CO INC NASDAQ STRL Automotive & Transport $219,4 Not Effective Not Effective 03/29/06 12/31/05 X

STONEMOR PARTNERS LP Nasdaq STON Consumer Services $99,7 Not Effective Not Effective 05/15/06 12/31/05 X X

SUPERIOR INDUSTRIES INTERNATIONAL INC NYSE SUP Automotive & Transport $844,9 Not Effective Not Effective 03/28/06 12/31/05 X X X

TECUMSEH PRODUCTS CO NASDAQ TECUA Industrial Manufacturing $1.847,0 Not Effective Not Effective 03/15/06 12/31/05 X X X

TEREX CORP NYSE TEX Industrial Manufacturing $6.380,4 Not Effective Not Effective 05/16/06 12/31/05 X X X X

TITANIUM METALS CORP NYSE TIE Industrial Manufacturing $749,8 Not Effective Not Effective 03/24/06 12/3/105 X X X

USA MOBILITY, INC Nasdaq USMO Electronics $618,6 Not Effective Not Effective 05/24/06 12/31/05 X X

UTSTARCOM INC NASDAQ UTSI Electronics $2.929,3 Not Effective Not Effective 05/31/06 12/31/05

VALHI INC NYSE VHI Consumer Products Manufacturers $1.529,3 Not Effective Not Effective 03/24/06 09/30/05 X X

WORLD FUEL SERVICES CORP NYSE INT Energy & Utilities $8.733,9 Not Effective Not Effective 03/16/06 12/31/05 X X

ZAPATA CORP NYSE ZAP Consumer Products Manufacturers $109,9 Not Effective Not Effective 04/04/06 12/31/05 X

Average $6.017,5

Source:

(1) NYSE (www.nyse.com)

(2) Compliance Week (www.complianceweek.com)

Other Acct.

(M&A, etc.)

IT, Financial

Systems

Vendor

ContractsDocumentation

Taxes

(Income,

Payroll)

Cash-FlowRevenue

RecognitionHedges

Control

Environment

Personnel:

Inadequate

Training and

Staffing

Financial

Procedures

Lease

Accounting

Disclosure

Controls &

Procedures

Internal Control

Over Financial

Reporting

Date of

Announcement As Of

COMPANY DETAILS (1)

ACCOUNTING ISSUES

ASSESSMENT (2) WEAKNESSES (2)

21

3.2 Research methodology.

To study the stock price value change after the disclosure of material weakness in the

internal control system I apply two different methods: the average variation analysis and

the Gaussian distribution analysis.

3.2.1 Average variation analysis.

The purpose of the average variation analysis is to understand if the stock value change at

the day of the material weakness announcement represents an exceptional data in

comparison with the stock trend of each company.

To achieve this result, I take into consideration the variation of stock price of each

company during a period of six months before and after the date of the announcement

(see Appendix 1).

After the calculation of the daily stock price variation, I apply the arithmetic mean to

obtain the stock price average variation during the selected period.

The mean is the arithmetic average of a set of values, or distribution. Given a set of

samples , the arithmetic mean is:

Where refers to the arithmetic mean, n refers to the sample size and x refers the value

each item.

As second step of this analysis, I compare the stock price performance at the day of the

announcement with the mean value to obtain the variation from the average.

Finally, I consolidate the data to investigate the effect of SOX material weakness on the

company share price (see Table 2).

22

The importance of this procedure can be explained using an example:

Company X at the day of the material weakness announcement has a percentage change

of stock value equal to -0,8%. This figure could lead to a conclusion that the

announcement has a negative effect on the company share price. Nevertheless, the stock

price of the same firm presents an average daily stock price difference of -1,5% during a

set period of time (e.g. six months). This fact implies that the market is not negatively

influenced by the statement of material weakness in the internal control system of

Company X, since in this case the stock price variation from the trend is + 0,7%, so a

positive difference.

Therefore, if the selected sample of companies would present a convincing negative

variation I could conclude that disclosures of a material weakness provoke negative

market reactions.

3.2.2 Gaussian distribution analysis.

Before explaining how the Gaussian distribution is applied to this research, it is essential

to provide specific theoretical information in order to understand the reasons for selecting

this statistical tool.

3.2.2.1 Theoretical framework.

The Gaussian distribution, also called normal distribution, is the most widely used family

of distributions in statistics. It is also called the bell curve because the graph of its

probability density resembles a bell.

Figure 1: The Gaussian Curve.

(Source: State University of New York, http://www.oswego.edu/)

23

Normal distribution arises in many areas of statistics. In particular the sampling

distribution of the mean is approximately normal, even if the distribution of the

population from which the sample is taken is not normal. In addition, the normal

distribution maximizes information entropy among all distributions with known mean and

variance, which makes it the natural choice of underlying distribution for data

summarized in terms of sample mean and variance, as the sample chosen for this study.

The Gaussian distribution can be actually specified by this equation:

So, the main parameters of the Gaussian distribution are the mean μ= , treated in the

previous subchapter, and the standard deviation (denoted with the letter sigma σ), which

is a measure of variability.

Now I am going to analyze the concept of standard deviation, the keystone of the normal

distribution, and the 68-95-99.7 rule, a property of the Gaussian distribution that will be

applied in the empirical research.

The standard deviation.

In statistics, the standard deviation (σ) of a population is a measure of the spread of its

values. It is defined as the square root of the variance (σ2 ). In other words, the standard

deviation is the root mean square deviation of values from their arithmetic mean.

The standard deviation is the most common measure of statistical dispersion, measuring

how widely spread the values in a data set are. If the data points are close to the mean,

then the standard deviation is small. Conversely, if many data points are far from the

mean, then the standard deviation is large.

The standard deviation of a random variable X is defined as:

Where E(X) is the expected value of X.

24

If the random variable X takes on the values x1,...,xN that are real numbers, then its

standard deviation can be computed as follows. First the mean of X , is defined as a

summation:

Where N is the number of samples taken. Next, the standard deviation simplifies to:

The standard deviation measures how far from the mean the data points tend to be.

A large standard deviation indicates that the data points are far from the mean and a small

standard deviation indicates that they are clustered closely around the mean (Barbara

Pacini & Meri Raggi, Statistica per l’analisi operativa dei dati).

68-95-99.7 rule.

The 68-95-99.7 rule states that for a normal distribution, almost all values lie within 3

standard deviations of the mean.

Figure 2: 68-95-99.7 rule.

(Source: State University of New York, http://www.oswego.edu/)

25

About 68% of the values lie within 1 standard deviation of the mean (or between the

mean minus 1 times the standard deviation, and the mean plus 1 times the standard

deviation). In statistical notation, it is represented as μ ± σ.

About 95% of the values lie within 2 standard deviations of the mean (or between the

mean minus 2 times the standard deviation, and the mean plus 2 times the standard

deviation). The statistical notation for it is: μ ± 2σ.

Almost all (actually, 99.7%) of the values lie within 3 standard deviations of the mean (or

between the mean minus 3 times the standard deviation and the mean plus 3 times the

standard deviation). Statisticians use the following notation to represent it: μ ± 3σ

(Barbara Pacini & Meri Raggi, Statistica per l’analisi operativa dei dati).

3.2.2.2 Application of the Gaussian distribution.

To comprehend the effects of announcements of a material control weakness on stock

price, I apply the Gaussian distribution and its rules to the value data of the selected

companies.

First of all, I calculate the average (μ) stock value difference at the day of the disclosure

for the whole sample. For a set of stock value differences, calculating the arithmetic mean

over a given period derives the expected increase/decrease on the stock price.

Secondly, for each individual firm I calculate the exponential difference between the

actual variation (Xi) and the expected stock price trend (μ).

Then I summarize the square differences, and dividing the result by the sample population

I obtain the variance (σ2 ).

Finally, I determine the standard deviation (σ) as the square root of the variance (σ2 ).

The standard deviation state the effect that the announcement of material weakness has on

the overall stock market - the larger the variance the greater the uncertain. The square

variance results in the measurement of global effects associated with material

weaknesses.

26

Afterward this measurement is applied to the 68-95-99.7 rule. This research is focused on

the first assertion of the rule, which states that the 68,25% of the values lie within 1

standard deviation of the mean. This is a significant data for the study, since it leads to

determine the range of stock price deviation that presents the highest probability to appear

after the announcement of a material weakness.

In this way the analysis can provide the most likelihood variation that the stock value will

present after a disclosure of material weakness.

I apply the same approach to the single types of industry and to the company dimension,

to understand if the announcement of material weakness has different impact on company

belonging to different business area or having diverse sizes.

27

4. EMPIRICAL TEST AND RESULTS

4.1 Introduction.

As the most influential regulation in decades, SOX has significant economic impact on

every listed firm. Consequently, I examine the changes of the market index around the

related announcement of material weakness in three steps:

I. The cumulative abnormal stock price variations around the announcement of

material weaknesses are examined to average variation analysis.

II. Stock price range of variation is estimated for the entire sample of companies

applying the Gaussian distribution.

III. Analysis of the effects of material weakness announcement for different types of

industries and company‟s dimension using the same methodology employed in the

step II.

The main axiom of this study is that announcements of material weaknesses can have

negative or no impact in the stock market, but never a positive impact. The reason of this

basic statement is that disclosures of material weaknesses in internal control over

financial reporting express the presence of a serious problem in the control system of the

listed firm, a problem that could lead to a misstatement of the financial reporting.

Subsequently, by definition, the announcement of internal control weaknesses cannot

have positive influence in the stock market (Zhang, Economic Consequences of the

Sarbanes-Oxley Act, 2005).

Other methodological issues related to the data selection, as well as stochastic formulas

and research strategy are discussed in detail in chapter three.

28

4.2 Results of the average variation analysis.

To examine the influence of material weakness reports on the stock value, I determine if

the stock value change at the day of the material weakness announcement represents an

exceptional data in comparison with the stock trend of each company.

4.2.1 Calculation of the company stock trend.

As first step of this research, I take into consideration the date of the disclosure of

material weakness (see Table 1).

Then, from the official NYSE website I attain the information regarding the daily stock

price of each selected company over a period of six months (the three months subsequent

and preceding the date of the announcement of a material weakness).

Consequently, I calculate for each selected firm the daily stock price variation with the

following formula.

Xpy = [P(y) - P(y-1)] / P(y-1) (1)

Where Xpy refers to the stock price variation of the day Y, P(y) refers to the stock value of

the day Y and P(y-1) refers to the stock price of the day Y-1.

For every company comprised in the sample, this formula is applied to each date of the

selected period of six months.

Finally, I calculate the expected stock price variation, applying for each firm the

arithmetical mean of the stock price variation Xpy over the selected period (see Appendix

1).

The expected stock price variation represents the stock market trend of the selected

company, since it indicates the movement of share prices within the space of six months.

29

4.2.3 Calculation of the average variation.

To obtain the actual stock price variation necessary for the calculation of the average

variation, I focused on the date of the disclosure of material weakness (see Table 1).

Then, from the official NYSE website I obtain the stock price of each selected company

at the date of the announcement of a material weakness (source: www.nyse.com). Then,

utilizing the previous formula (1), I calculate for each selected firm the daily actual stock

price variation at the date of the disclosure of material weakness.

Afterwards, the daily actual stock price variation is confronted with the expected share

price variation for every selected firm, obtaining the company‟s stock rate difference.

The company‟s stock rate difference expresses the deviation from the share price trend

that is caused by the announcement of material weaknesses. Extremely negative

difference between actual and expected value, as -4.03% for Allion Healthcare Inc.,

indicates that the announcement of material weakness has a negative impact on investors

and consequently on movement of company‟s share prices. Minimal differences between

actual and expected values, as +0,07% for Laureate Education Inc., suggests that the

movement of company‟s stock prices is not influenced by the disclosures of material

weakness.

Finally, I identify the overall stock rate difference through the calculation of the

arithmetic mean of the companies‟ stock rate differences.

The overall stock rate difference expresses a measure of volatility of the stock price

movement from the expected price variation at the date of the disclosures of material

weaknesses. This figure is particularly interesting, since it indicates if the announcement

of material weaknesses in the internal control has affected the market share value.

In fact, an exceptionally negative result of the aggregation of individual company‟s stock

rate difference, as example -2,00%, would mean that the actual variation of share prices

of companies presenting material weaknesses is on average less than the company share

price trend.

In this example, I could conclude that the announcement of material weaknesses has

globally a negative impact on the stock market.

30

Instead, the overall stock rate difference that I have calculated for the sample of

companies is equal to 0,06% (see Table 2).

The result tells that the discrepancy between the expected price variation and the actual

price movement at the day of the material weakness disclosure is just 0,06%.

Hence, despite announcements of material weaknesses, companies that present these

deficiencies in the internal control over financial reporting follow the price variation

trend.

Thus, the average variation analysis leads us to the conclusion that, although the

announcement of material weakness can have extremely negative effects on movement of

share price for individual companies, as Allion Helthcare Inc., the statement of material

weaknesses has globally little or no impact on the stock market, since the price share

follows the estimated trend.

31

Table 2: Average variation analysis

Company Actual Stock Price Variation (1) Expected Stock Price Variation (2) Stock Rate Difference

ABM INDUSTRIES INC 0,63% -0,11% 0,74%

AES CORP -2,23% 0,14% -2,37%

AIRTRAN HOLDINGS INC -1,68% 0,11% -1,79%ALLION HEALTHCARE INC -4,33% -0,30% -4,03%

AMERICA SERVICE GROUP INC -2,07% 0,03% -2,10%

BANK OF AMERICA CORP 0,78% 0,02% 0,76%

BELL INDUSTRIES INC -0,38% 0,17% -0,55%

BIOSCRIP, INC. 0,28% -0,22% 0,49%

BOWNE & CO INC 0,06% -0,05% 0,11%

BRADLEY PHARMACEUTICALS INC 0,00% 0,08% -0,08%

CACHE INC -2,24% -0,05% -2,18%

CAPITAL SENIOR LIVING CORP 3,80% 0,02% 3,78%

CASTLE A M & CO -0,94% 0,37% -1,31%

CDI CORP 0,22% -0,01% 0,22%

CERIDIAN CORP -0,15% -0,02% -0,13%

CHESAPEAKE CORP 0,23% -0,07% 0,30%

CHICAGO BRIDGE & IRON CO N V -1,00% 0,11% -1,11%

CNA FINANCIAL CORP 0,26% -0,02% 0,29%

CORNING INC -1,27% -0,19% -1,09%

CROSS A T CO 0,00% -0,36% 0,36%

CROWN MEDIA HOLDINGS INC 6,51% -0,54% 7,05%

CT COMMUNICATIONS INC 2,27% 0,50% 1,76%

DEVCON INTERNATIONAL CORP 0,50% -0,37% 0,87%

DRESSER-RAND GROUP INC. -1,62% -0,05% -1,57%

DYNEGY INC -1,01% 0,05% -1,06%

EMS TECHNOLOGIES INC 0,55% 0,08% 0,48%

EVCI CAREER COLLEGES HOLDING CORP 0,00% -1,29% 1,29%

GENERAL GROWTH PROPERTIES INC -1,27% -0,03% -1,25%

GENERAL MOTORS CORP -0,78% 0,32% -1,10%

H&R BLOCK INC -1,90% -0,01% -1,90%

HEMISPHERX BIOPHARMA INC -0,83% -0,19% -0,63%

HIGHWOODS PROPERTIES INC 2,86% 0,13% 2,72%

HOLLINGER INTERNATIONAL INC 0,84% -0,08% 0,93%

INPUT OUTPUT INC 0,93% 0,29% 0,64%

KANSAS CITY SOUTHERN -0,37% 0,07% -0,45%KROGER CO 0,61% 0,13% 0,48%

LANDAMERICA FINANCIAL GROUP INC -2,17% 0,01% -2,18%

LAUREATE EDUCATION, INC. -0,04% -0,11% 0,07%

LEAP WIRELESS INTERNATIONAL INC -0,44% 0,11% -0,55%

LENNOX INTERNATIONAL INC 0,09% -0,13% 0,23%

LHC GROUP, INC 1,20% 0,13% 1,07%

LIGAND PHARMACEUTICALS INC -1,01% -0,20% -0,81%

LINN ENERGY, LLC 0,05% 0,10% -0,05%

MAGELLAN HEALTH SERVICES INC 2,41% 0,33% 2,08%

MAX RE CAPITAL LTD 0,75% -0,03% 0,78%

MEADOW VALLEY CORP 0,56% 0,01% 0,55%

MODTECH HOLDINGS INC 0,11% -0,22% 0,33%

MOLSON COORS BREWING CO -0,01% 0,04% -0,05%

MOVIE GALLERY INC -2,48% 0,38% -2,86%

MUELLER INDUSTRIES INC 1,27% 0,14% 1,14%

NATURAL HEALTH TRENDS CORP 4,86% -0,75% 5,61%

NAUTILUS, INC. -1,83% -0,11% -1,73%

OM GROUP INC -1,24% 0,41% -1,66%

ONEOK INC 0,58% 0,15% 0,43%

ORCHID CELLMARK INC -4,40% -0,76% -3,64%

OVERSTOCK.COM, INC -0,78% -0,40% -0,38%

PACIFIC CMA INC -1,25% -0,03% -1,22%

PAXSON COMMUNICATIONS CORP -1,05% 0,01% -1,06%

PERFICIENT INC -2,93% 0,27% -3,20%

PETROLEUM DEVELOPMENT CORP -0,51% 0,01% -0,52%

POPULAR INC 0,65% -0,11% 0,76%

RETAIL VENTURES INC -2,32% 0,27% -2,59%

ROCK OF AGES CORP 5,45% 0,08% 5,37%

RUSS BERRIE & CO INC 5,40% 0,01% 5,38%

SM&A -2,67% -0,09% -2,58%

STERLING CONSTRUCTION CO INC -3,20% 0,45% -3,65%

STONEMOR PARTNERS LP 5,48% 0,00% 5,48%

SUPERIOR INDUSTRIES INTERNATIONAL INC -0,31% -0,12% -0,19%

TECUMSEH PRODUCTS CO 1,83% -0,09% 1,92%

TEREX CORP 1,38% 0,16% 1,22%

TITANIUM METALS CORP 2,75% 0,63% 2,12%

USA MOBILITY, INC -1,43% -0,14% -1,29%

UTSTARCOM INC 1,27% 0,24% 1,03%

VALHI INC -0,23% 0,23% -0,46%

WORLD FUEL SERVICES CORP 1,10% 0,21% 0,89%

ZAPATA CORP 0,00% 0,14% -0,14%Average 0,06%

OVERALL STOCK RATE DIFFERENCE 0,06%

Note:

(1) Percentage difference between the day before

and the day of the announcement of material

weaknesses.(2) Average percentage change of stock value

regardig a period of six months (three before and

three after the disclosures announcement).

STOCK PRICE AVERAGE VARIATION ANALYSIS

Stock Price Average Variation Analysis

32

4.3 Results of the Gaussian distribution analysis for the entire sample.

To investigate the impact on the stock market index of the auditors‟ declaration of

material weaknesses, I determine the range of share price variation that presents the major

probability to occur after the announcement of material weaknesses.

At the first stage of this analysis, I consider the date of the disclosure of material

weakness (see Table 1).

Then, from the official NYSE website I attain the stock value of each selected firm at the

date of the announcement of a material weakness (source: www.nyse.com). Then,

applying the formula (1) explained in the subchapter 4.2.1, I calculate for each selected

firm the daily actual stock price variation at the date of the disclosure of material

weakness.

After that, I specify an expected stock price model for the market index in order to

examine the abnormal returns of the actual stock market price. This model is different

from the esteem that was applied in the average variation analysis. In fact, the coefficient

μ used in the Gaussian distribution analysis indicates the market stock price variation at

the date of the disclosure.

It is calculated through the arithmetical mean of the daily stock price variation of each

company and it is equal to 0,05% (see Table 3).

The figure is really interesting, since for a set of stock value differences, calculating the

arithmetic mean over a given period derives the expected increase/decrease on the stock

price. So, the price variation esteem suggests that at the day of the statement of material

weaknesses the average effect on the share price is +0,05%.

After this passage, I calculate the standard deviation from the estimated stock price

variation, which is equivalent to 2,1013%.

The standard deviation measures statistical dispersion, determining how widely spread

the values in a data set are. A large standard deviation, as in this case, denotes that the

33

stock price actual variations are far from the estimation μ and that the price volatility is

rather elevated.

This assumption is confirmed by the consequent application of the Gaussian distribution

68-95-99.7 rule.

In fact, I utilized the 68-95-99.7 rule, since if I discovered that the 68,25% of the share

price variations fall, as example, between -2,00% and -1,00%, then I could conclude that

the announcement of material weaknesses has a negative impact on investors and on the

market. This conclusion would be caused by the evidence that the majority of the share

price variation (68,25%) is negative, between -2,00% and -1,00%.

However, this is not the case, since the result of the study states that the 68,25% of stock

price variations fall between -2,0470% and 2,1556% (see Table 3), a wide range of stock

price variation that comprise equally negative and positive values.

Consequently, the analysis performed using the Gaussian distribution over the whole

population suggests that globally the announcement of a material weakness has little or

no impact on the stock price variation.

34

Table 3: Gaussian distribution analysis.

Stock Price Analysis - Gauss Distribution Analysis

Xi μ Xi-μ (Xi-μ)^2

Company Actual Stock Price Variation (1) Expected Stock Price Variation (Average) Delta Square Delta

ABM INDUSTRIES INC 0,63% 0,05% 0,57% 0,0033%

AES CORP -2,23% 0,05% -2,28% 0,0521%

AIRTRAN HOLDINGS INC -1,68% 0,05% -1,73% 0,0301%ALLION HEALTHCARE INC -4,33% 0,05% -4,38% 0,1922%

AMERICA SERVICE GROUP INC -2,07% 0,05% -2,13% 0,0452%

BANK OF AMERICA CORP 0,78% 0,05% 0,72% 0,0052%

BELL INDUSTRIES INC -0,38% 0,05% -0,43% 0,0019%

BIOSCRIP, INC. 0,28% 0,05% 0,22% 0,0005%

BOWNE & CO INC 0,06% 0,05% 0,01% 0,0000%

BRADLEY PHARMACEUTICALS INC 0,00% 0,05% -0,05% 0,0000%

CACHE INC -2,24% 0,05% -2,29% 0,0524%

CAPITAL SENIOR LIVING CORP 3,80% 0,05% 3,75% 0,1403%

CASTLE A M & CO -0,94% 0,05% -0,99% 0,0099%

CDI CORP 0,22% 0,05% 0,16% 0,0003%

CERIDIAN CORP -0,15% 0,05% -0,21% 0,0004%

CHESAPEAKE CORP 0,23% 0,05% 0,17% 0,0003%

CHICAGO BRIDGE & IRON CO N V -1,00% 0,05% -1,06% 0,0112%

CNA FINANCIAL CORP 0,26% 0,05% 0,21% 0,0004%

CORNING INC -1,27% 0,05% -1,33% 0,0177%

CROSS A T CO 0,00% 0,05% -0,05% 0,0000%

CROWN MEDIA HOLDINGS INC 6,51% 0,05% 6,46% 0,4173%

CT COMMUNICATIONS INC 2,27% 0,05% 2,22% 0,0491%

DEVCON INTERNATIONAL CORP 0,50% 0,05% 0,45% 0,0020%

DRESSER-RAND GROUP INC. -1,62% 0,05% -1,67% 0,0280%

DYNEGY INC -1,01% 0,05% -1,06% 0,0112%

EMS TECHNOLOGIES INC 0,55% 0,05% 0,50% 0,0025%

EVCI CAREER COLLEGES HOLDING CORP 0,00% 0,05% -0,05% 0,0000%

GENERAL GROWTH PROPERTIES INC -1,27% 0,05% -1,33% 0,0176%

GENERAL MOTORS CORP -0,78% 0,05% -0,84% 0,0070%

H&R BLOCK INC -1,90% 0,05% -1,96% 0,0383%

HEMISPHERX BIOPHARMA INC -0,83% 0,05% -0,88% 0,0078%

HIGHWOODS PROPERTIES INC 2,86% 0,05% 2,80% 0,0785%

HOLLINGER INTERNATIONAL INC 0,84% 0,05% 0,79% 0,0062%

INPUT OUTPUT INC 0,93% 0,05% 0,87% 0,0076%

KANSAS CITY SOUTHERN -0,37% 0,05% -0,43% 0,0018%KROGER CO 0,61% 0,05% 0,56% 0,0031%

LANDAMERICA FINANCIAL GROUP INC -2,17% 0,05% -2,22% 0,0493%

LAUREATE EDUCATION, INC. -0,04% 0,05% -0,09% 0,0001%

LEAP WIRELESS INTERNATIONAL INC -0,44% 0,05% -0,49% 0,0024%

LENNOX INTERNATIONAL INC 0,09% 0,05% 0,04% 0,0000%

LHC GROUP, INC 1,20% 0,05% 1,15% 0,0132%

LIGAND PHARMACEUTICALS INC -1,01% 0,05% -1,07% 0,0114%

LINN ENERGY, LLC 0,05% 0,05% 0,00% 0,0000%

MAGELLAN HEALTH SERVICES INC 2,41% 0,05% 2,36% 0,0557%

MAX RE CAPITAL LTD 0,75% 0,05% 0,69% 0,0048%

MEADOW VALLEY CORP 0,56% 0,05% 0,51% 0,0026%

MODTECH HOLDINGS INC 0,11% 0,05% 0,06% 0,0000%

MOLSON COORS BREWING CO -0,01% 0,05% -0,07% 0,0000%

MOVIE GALLERY INC -2,48% 0,05% -2,53% 0,0642%

MUELLER INDUSTRIES INC 1,27% 0,05% 1,22% 0,0149%

NATURAL HEALTH TRENDS CORP 4,86% 0,05% 4,81% 0,2313%

NAUTILUS, INC. -1,83% 0,05% -1,89% 0,0356%

OM GROUP INC -1,24% 0,05% -1,30% 0,0168%

ONEOK INC 0,58% 0,05% 0,53% 0,0028%

ORCHID CELLMARK INC -4,40% 0,05% -4,46% 0,1988%

OVERSTOCK.COM, INC -0,78% 0,05% -0,83% 0,0069%

PACIFIC CMA INC -1,25% 0,05% -1,30% 0,0170%

PAXSON COMMUNICATIONS CORP -1,05% 0,05% -1,11% 0,0123%

PERFICIENT INC -2,93% 0,05% -2,98% 0,0888%

PETROLEUM DEVELOPMENT CORP -0,51% 0,05% -0,56% 0,0032%

POPULAR INC 0,65% 0,05% 0,59% 0,0035%

RETAIL VENTURES INC -2,32% 0,05% -2,38% 0,0564%

ROCK OF AGES CORP 5,45% 0,05% 5,39% 0,2908%

RUSS BERRIE & CO INC 5,40% 0,05% 5,34% 0,2854%

SM&A -2,67% 0,05% -2,73% 0,0744%

STERLING CONSTRUCTION CO INC -3,20% 0,05% -3,25% 0,1058%

STONEMOR PARTNERS LP 5,48% 0,05% 5,43% 0,2943%

SUPERIOR INDUSTRIES INTERNATIONAL INC -0,31% 0,05% -0,37% 0,0013%

TECUMSEH PRODUCTS CO 1,83% 0,05% 1,77% 0,0314%

TEREX CORP 1,38% 0,05% 1,32% 0,0175%

TITANIUM METALS CORP 2,75% 0,05% 2,69% 0,0725%

USA MOBILITY, INC -1,43% 0,05% -1,49% 0,0221%

UTSTARCOM INC 1,27% 0,05% 1,22% 0,0148%

VALHI INC -0,23% 0,05% -0,29% 0,0008%

WORLD FUEL SERVICES CORP 1,10% 0,05% 1,04% 0,0109%

ZAPATA CORP 0,00% 0,05% -0,05% 0,0000%

Sum [(Xi-μ)^2] 3,3558%VARIANCE ( σ^2 ) σ^2=Sum [(Xi-μ)^2] / N 0,0442%

STANDARD DEVIATION (σ) σ= Sqr[Sum [(Xi-μ)^2] / N] 2,1013%

GAUSS CURVE ANALISIS (2) μ-σ -2,0470%

μ+σ 2,1556%

STOCK PRICE ANALYSIS - GAUSS DISTRIBUTION ANALYSIS

35

4.4 Results of the Gaussian distribution analysis applied to the type of industry.

The purpose of this subchapter is to analyze the relation between announcement of

material control weakness over financial reporting, stock price variation and type of

industry.

In order to perform this study I have divided the sample companies in nine industries, and

I have applied for each sector the Gaussian distribution analysis.

4.4.1 Automotive and transport.

The application of the Gaussian distribution analysis over a sample of six companies

belonging to the automotive and transport industry shows two interesting results (see

Table 4):

1. An expected share price variation is equal to -1,26641%. An expected share price

variation of -1,26641% means that at the day of the announcement the average

share value change in companies belonging to this industry is highly negative.

2. The 68,25% of share price variation falls between -2,25355% and -0,27928%.

This data indicates that at the day of the disclosure of material weaknesses the

majority of share price variations of companies belonging to this category are

negative.

These results lead to the conclusion that the announcement of material weaknesses over

financial reporting has a negative effect on stock price variation of automotive and

transportation firms.

36

Table 4: Gaussian distribution analysis. Industry: Automotive & Transport.

Stock Price Analysis: Automotive & Transport- Gauss Distrbution


Company Stock Value Difference Average Difference Delta Delta^2

AIRTRAN HOLDINGS INC -1,68% -1,26641% -0,41% 0,0017%

GENERAL MOTORS CORP -0,78% -1,26641% 0,48% 0,0023%KANSAS CITY SOUTHERN -0,37% -1,26641% 0,89% 0,0080%

PACIFIC CMA INC -1,25% -1,26641% 0,02% 0,0000%

STERLING CONSTRUCTION CO INC -3,20% -1,26641% -1,93% 0,0373%

SUPERIOR INDUSTRIES INTERNATIONAL INC -0,31% -1,26641% 0,96% 0,0091%

Sum [(Xi-μ)^2] 0,0585%

VARIANCE ( σ^2 ) σ^2=Sum [(Xi-μ)^2] / N 0,0097%


GAUSS CURVE ANALISIS μ-σ -2,25355%

μ+σ -0,27928%

STOCK PRICE ANALYSIS - GAUSS CURVE

4.4.2 Construction.

In the construction industry the Gaussian distribution analysis is applied on a sample of

four companies.

As we can seen in Table 5, the expected share price variation is +1,38%, which means

that at the day of the announcement the average share value change in companies

belonging to this industry is positive.

Then I have calculated that the 68,25% of share price variation falls between -1,0542%

and +3,8084%. Hence, these data suggests that the major part of share value changes of

companies belonging to this category is positive at the date of material weakness

disclosure.

Since the axiom of this study states that in any case announcements of material

weaknesses can have just negative or no impact in the stock market, these results imply

that the announcement of material weaknesses over financial reporting has no impact on

stock price variation of construction firms.

37

Table 5: Gaussian distribution analysis. Industry: Construction.

Stock Price Analysis: Construction- Gauss Distrbution



CHICAGO BRIDGE & IRON CO N V -1,00% 1,38% -2,38% 0,0567%

DEVCON INTERNATIONAL CORP 0,50% 1,38% -0,87% 0,0076%

MEADOW VALLEY CORP 0,56% 1,38% -0,81% 0,0066%

ROCK OF AGES CORP 5,45% 1,38% 4,07% 0,1656%

Sum [(Xi-μ)^2] 0,2365%




μ+σ 3,8094%


4.4.3 Consumer product manufacturers.

The application of the Gaussian distribution analysis over a sample of eight companies

belonging to the consumer product manufacturer industry (see Table 6) provides the same

results that were seen in the construction business.

As matter of fact, the expected share price variation equals to +1,04%, showing a positive

value change at the day of the disclosures of material weaknesses.

At the same time, the 68,25% of share price variation is between -1,4031% and

+3,4761%, meaning that majority of share price variations of companies belonging to

this category are positive at the date of the announcement.

Finally, these facts suggest that the announcement of material weaknesses over financial

reporting has no impact on stock price variation of consumer product manufactures

firms.

38

Table 6: Gaussian distribution analysis. Industry: Consumer product manufactures.

Stock Price Analysis: Consumer Product Manufactures- Gauss Distrbution



CROSS A T CO 0,00% 1,04% -1,04% 0,0107%

MODTECH HOLDINGS INC 0,11% 1,04% -0,92% 0,0085%

MOLSON COORS BREWING CO -0,01% 1,04% -1,05% 0,0110%

NATURAL HEALTH TRENDS CORP 4,86% 1,04% 3,83% 0,1464%

NAUTILUS, INC. -1,83% 1,04% -2,87% 0,0824%

RUSS BERRIE & CO INC 5,40% 1,04% 4,36% 0,1901%

VALHI INC -0,23% 1,04% -1,27% 0,0161%

ZAPATA CORP 0,00% 1,04% -1,04% 0,0107%

Sum [(Xi-μ)^2] 0,4761%




μ+σ 3,4761%


4.4.4 Consumer services.

The analysis of the consumer services business through the Gaussian distribution shows

equilibrium between positive and negative price variation.

Actually, the expected share price variation is equal to -0,06%, denoting that the

announcement of material weaknesses does not affect the share value change in consumer

service companies.

Moreover, the 68,25% of share price variation falls between -2,5758% and +2,4603%,

indicating that the majority of share price variations is equally positive and negative.

These outcomes lead to the conclusion that the announcement of a material weakness has

little or no impact on the stock price variation of consumer services firms.

39

Table 7: Gaussian distribution analysis. Industry: Consumer services.

Stock Price Analysis: Consumer Services- Gauss Distrbution



CACHE INC -2,24% -0,06% -2,18% 0,0474%

EVCI CAREER COLLEGES HOLDING CORP 0,00% -0,06% 0,06% 0,0000%

H&R BLOCK INC -1,90% -0,06% -1,85% 0,0341%

KROGER CO 0,61% -0,06% 0,67% 0,0045%

LAUREATE EDUCATION, INC. -0,04% -0,06% 0,02% 0,0000%

RETAIL VENTURES INC -2,32% -0,06% -2,26% 0,0512%

STONEMOR PARTNERS LP 5,48% -0,06% 5,54% 0,3066%

Sum [(Xi-μ)^2] 0,4438%




μ+σ 2,4603%


4.4.5 Electronics.

At the date of the announcement of material weaknesses, the movement of share prices in

the electronics industries (see Table 8) presents the same patter that was found in the

construction and consumer manufacturing business.

Also in this case the expected share price variation is positive (+0,42%), as well as the

majority of share value changes, where the application of the 68 rule shows a range of

data that falls between -0,6518% and +1,5012%.

Consequently, these figures indicate that the announcement of material weaknesses over

financial reporting has no impact on stock price variation of electronics firms.

40

Table 8: Gaussian distribution analysis. Industry: Electronics.

Stock Price Analysis: Electronics- Gauss Distribution



ABM INDUSTRIES INC 0,63% 0,42% 0,20% 0,0004%

BELL INDUSTRIES INC -0,38% 0,42% -0,80% 0,0065%

CT COMMUNICATIONS INC 2,27% 0,42% 1,84% 0,0340%

EMS TECHNOLOGIES INC 0,55% 0,42% 0,13% 0,0002%

INPUT OUTPUT INC 0,93% 0,42% 0,50% 0,0025%

LEAP WIRELESS INTERNATIONAL INC -0,44% 0,42% -0,86% 0,0075%

USA MOBILITY, INC -1,43% 0,42% -1,86% 0,0345%

UTSTARCOM INC 1,27% 0,42% 0,85% 0,0071%

Sum [(Xi-μ)^2] 0,0927%




μ+σ 1,5012%


4.4.6 Energy and utilities.

In the energy and utilities industry, as in the automotive business, the application

Gaussian distribution analysis (see Table 9) shows a direct negative correlation between

the announcement of material weaknesses and share price variation.

In fact, the expected share price variation equals to -0,34%, stating that at the date of the

disclosure of material weaknesses the average share value change is negative.

Furthermore, the 68,25% of share price variation is between -1,4238% and +0,7621%,

which means that at the day of the announcement the majority of share price variations is

negative in this category.

Subsequently, these facts demonstrate that the announcement of material weaknesses over

financial reporting has a negative impact on stock price variation of energy and

utilities firms.

41

Table 9: Gaussian distribution analysis. Industry: Energy and Utilities.

Stock Price Analysis: Energy & Utilites - Gauss Distribution



AES CORP -2,23% -0,34% -1,89% 0,0358%

DYNEGY INC -1,01% -0,34% -0,67% 0,0045%LINN ENERGY, LLC 0,05% -0,34% 0,39% 0,0015%

ONEOK INC 0,58% -0,34% 0,92% 0,0084%

PETROLEUM DEVELOPMENT CORP -0,51% -0,34% -0,17% 0,0003%

WORLD FUEL SERVICES CORP 1,10% -0,34% 1,43% 0,0205%

Sum [(Xi-μ)^2] 0,0710%




μ+σ 0,7521%


4.4.7 Financial services.

The application of the Gaussian distribution analysis over a sample of fifteen companies

belonging to the financial services industry (see Table 10) suggests a weak correlation

between disclosure of material weaknesses and share price variation.

As matter of fact, the expected share price variation of -0,36% already shows slightly

negative esteem of share value change at the day of the announcement.

Moreover, a small majority of share price variations of financial service companies is

negative, falling between -1,8265% and +1,1070%.

Consequently, these data denote that the announcement of material weaknesses over

financial reporting has a slightly negative effect on stock price variation of financial

services firms.

42

Table 10: Gaussian distribution analysis. Industry: Financial services.

Stock Price Analysis: Financial Services - Gauss Distribution



BANK OF AMERICA CORP 0,78% -0,36% 1,14% 0,0129%

BIOSCRIP, INC. 0,28% -0,36% 0,64% 0,0041%

BOWNE & CO INC 0,06% -0,36% 0,42% 0,0018%

CDI CORP 0,22% -0,36% 0,58% 0,0033%

CERIDIAN CORP -0,15% -0,36% 0,21% 0,0004%

CNA FINANCIAL CORP 0,26% -0,36% 0,62% 0,0039%

CORNING INC -1,27% -0,36% -0,91% 0,0084%

GENERAL GROWTH PROPERTIES INC -1,27% -0,36% -0,91% 0,0083%

HIGHWOODS PROPERTIES INC 2,86% -0,36% 3,22% 0,1034%

LANDAMERICA FINANCIAL GROUP INC -2,17% -0,36% -1,81% 0,0326%

MAX RE CAPITAL LTD 0,75% -0,36% 1,11% 0,0123%

OVERSTOCK.COM, INC -0,78% -0,36% -0,42% 0,0018%

PERFICIENT INC -2,93% -0,36% -2,57% 0,0659%

POPULAR INC 0,65% -0,36% 1,01% 0,0101%

SM&A -2,67% -0,36% -2,31% 0,0535%

Sum [(Xi-μ)^2] 0,3227%




μ+σ 1,1070%

Standard deviation


4.4.8 Industrial manufacturing.

The movement of share prices in the industrial manufacturing industry (see Table 11)

shows the same results that were obtained through the application of the Gaussian

distribution analysis to the construction, consumer manufacturing and electronic

businesses.

The expected share price variation is equal to +0,42%, indicating a positive average share

value change in companies belonging to this industry.

Furthermore, the 68,25% of share price variation is between -0,9965% and +1,8283%,

which means that at the day of the disclosure of material weaknesses the majority of share

price variations is positive.

Consequently, these figures suggest that the announcement of material weaknesses over

financial reporting has no impact on stock price variation of industrial manufactirung

firms.

43

Table 11: Gaussian distribution analysis. Industry: Industrial manufacturing.

Stock Price Analysis: Industrial Manufacturing - Gauss Distribution



CASTLE A M & CO -0,94% 0,42% -1,36% 0,0184%

CHESAPEAKE CORP 0,23% 0,42% -0,19% 0,0004%

DRESSER-RAND GROUP INC. -1,62% 0,42% -2,03% 0,0414%

LENNOX INTERNATIONAL INC 0,09% 0,42% -0,32% 0,0010%

MUELLER INDUSTRIES INC 1,27% 0,42% 0,86% 0,0074%

OM GROUP INC -1,24% 0,42% -1,66% 0,0275%

TECUMSEH PRODUCTS CO 1,83% 0,42% 1,41% 0,0199%

TEREX CORP 1,38% 0,42% 0,96% 0,0092%

TITANIUM METALS CORP 2,75% 0,42% 2,33% 0,0544%

Sum [(Xi-μ)^2] 0,1795%




μ+σ 1,8283%


4.4.9 Media.

The application of the Gaussian distribution analysis over a sample of four companies

belonging to the media industry (see Table 12) denotes a direct negative correlation

between the announcement of material weaknesses and share price variation.

As matter of fact, the expected share price variation equals to -1,65%., stating that at the

date of the disclosure of material weaknesses the average share value change is negative.

This result is strengthen by the fact that the majority of share price variations, 68,25%, of

media companies falls between -3,3976% and +0,1069%


financial reporting has a negative effect on stock price variation of media firms.

44

Table 12: Gaussian distribution analysis. Industry: Media.

Stock Price Analysis: Media - Gauss Distribution



CROWN MEDIA HOLDINGS INC -3,89% -1,65% -2,25% 0,0505%

HOLLINGER INTERNATIONAL INC 0,84% -1,65% 2,49% 0,0619%

MOVIE GALLERY INC -2,48% -1,65% -0,83% 0,0070%

PAXSON COMMUNICATIONS CORP -1,05% -1,65% 0,59% 0,0035%

Sum [(Xi-μ)^2] 0,1228%




μ+σ 0,1069%


4.4.10 Pharmaceutical.

The analysis of share price variation in the pharmaceutical industry (see Table 13), like in

the financial services industry, suggests a weak correlation between disclosure of material

weaknesses and share price variation.

In fact, the expected share price variation of -0,36% indicates slightly negative esteem of

share value change at the day of the announcement.

Additionally, a small majority of share price variations of financial service companies is

negative, falling between -3,2229% and +2,0611%.


financial reporting has a slightly negative effect on stock price variation of

pharmaceutical firms.

45

Table 13: Gaussian distribution analysis. Industry: Pharmaceuticals.

Stock Price Analysis: Pharmaceuticals - Gauss Distribution



ALLION HEALTHCARE INC -4,33% -0,58% -3,75% 0,1406%

AMERICA SERVICE GROUP INC -2,07% -0,58% -1,49% 0,0222%

BRADLEY PHARMACEUTICALS INC 0,00% -0,58% 0,58% 0,0034%

CAPITAL SENIOR LIVING CORP 3,80% -0,58% 4,38% 0,1919%

HEMISPHERX BIOPHARMA INC -0,83% -0,58% -0,25% 0,0006%

LHC GROUP, INC 1,20% -0,58% 1,78% 0,0318%

LIGAND PHARMACEUTICALS INC -1,01% -0,58% -0,43% 0,0019%

MAGELLAN HEALTH SERVICES INC 2,41% -0,58% 3,00% 0,0897%

ORCHID CELLMARK INC -4,40% -0,58% -3,82% 0,1462%

Sum [(Xi-μ)^2] 0,6282%




μ+σ 2,0611%


4.5 Results of the Gaussian distribution analysis applied to the company size.

The aim of this subchapter is to examine the relation between announcement of material

control weakness over financial reporting, stock price variation and company size.

To complete this research I have grouped the companies, which were chosen as study

sample, in the following three categories based on the revenues achieved during the fiscal

year 2005:

1. Small size companies: defined as firms presenting figures of total revenues under

1 billion of dollars;

2. Medium size companies: defined as firms presenting figures of total revenues

between 1 and 4 billions of dollars;

3. Large size companies: defined as firms presenting figures of total revenues up to 4

billions of dollars

The Gaussian distribution analysis is applied for each category.

46

4.5.1 Small size companies.

The application of the Gaussian distribution analysis over a sample of forty-four small

size companies shows two results (see Table 14):

1. An expected share price variation is equal to +0,28%, which means, as we have

previously seen, that the announcement of material weaknesses does not affect the

share value change in companies belonging to this group.

2. The 68,25% of share price variation falls between -2,2898% and +2,8398%,

indicating that at the day of the disclosure of material weaknesses the majority of

share price variations are equally positive and negative.

These results lead to the conclusion that the announcement of a material weakness has

little or no impact on the stock price variation of small size firms.

4.5.2 Medium size companies.

The movement of share price variation in medium size companies (see Table 15),

indicates a weak correlation between disclosure of material weaknesses and share price

variation.

As matter of fact, the expected share price variation is -0,26%, denoting a slightly

negative share value change at the day of the announcement.

Moreover, I notice that a small majority of share value changes is negative through the

application of the 68 rule that shows a range of data between -1,3518% and +0,8363%..

These facts suggest that the announcement of material weaknesses over financial

reporting has a slightly negative effect on stock price variation of medium size firms.

47

Table 14: Gaussian distribution analysis. Category: Small size companies.

Stock Price Analysis: Small Companies - Gauss Distribution

FY '05 Rev. Xi μ Xi-μ (Xi-μ)^2

Company (in millions) Stock Value Difference Average Difference Delta Delta^2

HEMISPHERX BIOPHARMA INC $1,1 -0,83% 0,28% -1,10% 0,0121%

LINN ENERGY, LLC $49,7 0,05% 0,28% -0,22% 0,0005%

EVCI CAREER COLLEGES HOLDING CORP $50,7 0,00% 0,28% -0,28% 0,0008%ORCHID CELLMARK INC $61,6 -4,40% 0,28% -4,68% 0,2189%

SM&A $76,7 -2,67% 0,28% -2,95% 0,0869%

DEVCON INTERNATIONAL CORP $84,9 0,50% 0,28% 0,23% 0,0005%

ROCK OF AGES CORP $89,5 5,45% 0,28% 5,17% 0,2675%

PERFICIENT INC $97,0 -2,93% 0,28% -3,20% 0,1025%

STONEMOR PARTNERS LP $99,7 5,48% 0,28% 5,20% 0,2709%

CAPITAL SENIOR LIVING CORP $105,2 3,80% 0,28% 3,52% 0,1242%

ZAPATA CORP $109,9 0,00% 0,28% -0,28% 0,0008%

ALLION HEALTHCARE INC $123,1 -4,33% 0,28% -4,61% 0,2121%

PACIFIC CMA INC $125,0 -1,25% 0,28% -1,53% 0,0233%

CROSS A T CO $129,1 0,00% 0,28% -0,28% 0,0008%

BELL INDUSTRIES INC $130,9 -0,38% 0,28% -0,65% 0,0043%

BRADLEY PHARMACEUTICALS INC $133,4 0,00% 0,28% -0,28% 0,0008%

LHC GROUP, INC $162,5 1,20% 0,28% 0,93% 0,0086%

CT COMMUNICATIONS INC $171,7 2,27% 0,28% 1,99% 0,0398%

LIGAND PHARMACEUTICALS INC $176,6 -1,01% 0,28% -1,29% 0,0166%

MEADOW VALLEY CORP $183,9 0,56% 0,28% 0,29% 0,0008%

NATURAL HEALTH TRENDS CORP $194,5 4,86% 0,28% 4,59% 0,2105%

CROWN MEDIA HOLDINGS INC $197,4 6,51% 0,28% 6,24% 0,3893%

STERLING CONSTRUCTION CO INC $219,4 -3,20% 0,28% -3,47% 0,1207%

MODTECH HOLDINGS INC $230,3 0,11% 0,28% -0,16% 0,0003%

PAXSON COMMUNICATIONS CORP $254,2 -1,05% 0,28% -1,33% 0,0176%

CACHE INC $266,3 -2,24% 0,28% -2,51% 0,0630%

RUSS BERRIE & CO INC $290,2 5,40% 0,28% 5,12% 0,2623%

EMS TECHNOLOGIES INC $310,0 0,55% 0,28% 0,28% 0,0008%

PETROLEUM DEVELOPMENT CORP $343,1 -0,51% 0,28% -0,79% 0,0062%

INPUT OUTPUT INC $368,7 0,93% 0,28% 0,65% 0,0042%

HIGHWOODS PROPERTIES INC $410,7 2,86% 0,28% 2,58% 0,0666%

HOLLINGER INTERNATIONAL INC $457,9 0,84% 0,28% 0,57% 0,0032%

AMERICA SERVICE GROUP INC $562,7 -2,07% 0,28% -2,35% 0,0551%

USA MOBILITY, INC $618,6 -1,43% 0,28% -1,71% 0,0292%

NAUTILUS, INC. $631,3 -1,83% 0,28% -2,11% 0,0445%BOWNE & CO INC $694,1 0,06% 0,28% -0,21% 0,0005%

TITANIUM METALS CORP $749,8 2,75% 0,28% 2,47% 0,0611%

OVERSTOCK.COM, INC $803,8 -0,78% 0,28% -1,05% 0,0111%

SUPERIOR INDUSTRIES INTERNATIONAL INC $844,9 -0,31% 0,28% -0,59% 0,0034%

LAUREATE EDUCATION, INC. $875,4 -0,04% 0,28% -0,31% 0,0010%

LEAP WIRELESS INTERNATIONAL INC $914,7 -0,44% 0,28% -0,71% 0,0051%

CASTLE A M & CO $959,0 -0,94% 0,28% -1,22% 0,0148%

Sum [(Xi-μ)^2] 2,7629%




μ+σ 2,8398%


48

Table 15: Gaussian distribution analysis. Category: Medium size companies.

Stock Price Analysis: Medium Companies - Gauss Distribution



CHESAPEAKE CORP $1.042,0 0,23% -0,26% 0,48% 0,0023%

BIOSCRIP, INC. $1.073,2 0,28% -0,26% 0,54% 0,0029%

CDI CORP $1.133,6 0,22% -0,26% 0,47% 0,0022%

MAX RE CAPITAL LTD $1.175,0 0,75% -0,26% 1,01% 0,0101%

DRESSER-RAND GROUP INC. $1.208,2 -1,62% -0,26% -1,36% 0,0185%

KANSAS CITY SOUTHERN $1.352,0 -0,37% -0,26% -0,12% 0,0001%

AIRTRAN HOLDINGS INC $1.450,5 -1,68% -0,26% -1,42% 0,0202%

CERIDIAN CORP $1.459,0 -0,15% -0,26% 0,10% 0,0001%

VALHI INC $1.529,3 -0,23% -0,26% 0,02% 0,0000%

MUELLER INDUSTRIES INC $1.729,9 1,27% -0,26% 1,53% 0,0235%

MAGELLAN HEALTH SERVICES INC $1.808,0 2,41% -0,26% 2,67% 0,0714%

TECUMSEH PRODUCTS CO $1.847,0 1,83% -0,26% 2,08% 0,0434%

MOVIE GALLERY INC $1.987,2 -2,48% -0,26% -2,22% 0,0494%

OM GROUP INC $2.149,6 -1,24% -0,26% -0,99% 0,0097%

CHICAGO BRIDGE & IRON CO N V $2.257,5 -1,00% -0,26% -0,75% 0,0056%

DYNEGY INC $2.313,0 -1,01% -0,26% -0,75% 0,0056%

ABM INDUSTRIES INC $2.587,8 0,63% -0,26% 0,89% 0,0079%

RETAIL VENTURES INC $2.739,6 -2,32% -0,26% -2,06% 0,0426%

UTSTARCOM INC $2.929,3 1,27% -0,26% 1,53% 0,0233%

GENERAL GROWTH PROPERTIES INC $3.073,4 -1,27% -0,26% -1,01% 0,0103%

LENNOX INTERNATIONAL INC $3.366,2 0,09% -0,26% 0,35% 0,0012%

POPULAR INC $3.451,1 0,65% -0,26% 0,90% 0,0082%

LANDAMERICA FINANCIAL GROUP INC $3.959,6 -2,17% -0,26% -1,91% 0,0364%

Sum [(Xi-μ)^2] 0,3950%




μ+σ 0,8363%


4.5.3 Large size companies.

The Gaussian distribution analysis applied in large size companies (see Table 16)

provides results that are similar to the ones that were obtained in medium size firms.

Also in this case the expected share price variation is slightly negative (-0,14%) and the

small majority of stock price variations is negative, since the 68,25% of stock value

change falls between -1,3079% and +1,0355%. egative.

Consequently, these data indicates that the announcement of material weaknesses over

financial reporting has a slightly negative effect on stock price variation of large size

firms.

49

Table 16: Gaussian distribution analysis. Category: Large size companies.

Stock Price Analysis: Large Companies - Gauss Distribution



H&R BLOCK INC $4.420,0 -1,90% -0,14% -1,77% 0,0312%

CORNING INC $4.579,0 -1,27% -0,14% -1,14% 0,0130%

MOLSON COORS BREWING CO $5.506,9 -0,01% -0,14% 0,12% 0,0001%

TEREX CORP $6.380,4 1,38% -0,14% 1,51% 0,0229%

WORLD FUEL SERVICES CORP $8.733,9 1,10% -0,14% 1,23% 0,0152%

CNA FINANCIAL CORP $9.862,0 0,26% -0,14% 0,40% 0,0016%

AES CORP $11.086,0 -2,23% -0,14% -2,09% 0,0437%

ONEOK INC $12.760,2 0,58% -0,14% 0,72% 0,0051%

KROGER CO $56.434,0 0,61% -0,14% 0,75% 0,0056%

BANK OF AMERICA CORP $83.980,0 0,78% -0,14% 0,91% 0,0083%

GENERAL MOTORS CORP $192.604,0 -0,78% -0,14% -0,65% 0,0042%

Sum [(Xi-μ)^2] 0,1510%




μ+σ 1,0355%


50

5. CONCLUSIONS

One of the fundamental limitations of event studies in the stock exchange market is that

the measured stock price performance could also capture other information released at the

same calendar date (Leftwich, 1981).

This problem particularly stands out in this paper‟s setting. The market abnormal returns

likely incorporate investors‟ reactions to news releases about other legislative activities,

accounting scandals, and economic statistics.

This paper investigates the effects of the Sarbanes Oxley Act in the stock exchange

market, through the examination of market reactions to the disclosures of a material

weakness during the evaluation of company internal control system.

I have found out that the cumulative abnormal return around the announcement of

material control weakness is not relevant.

Both the average variation study and the Gaussian distribution analysis underline that

variation of the share price at the date of the disclosure follows the expected value models

established for each of the two research methods.

But why such serious information, expressing the possibility of a material misstatement

of the financial reporting, does not influence the stock market?

According to Solomon, normally the knowledge about the possible material weaknesses

in the internal control system of one company is already known by the market and by

investors prior to the final disclosures of the auditors. This is mainly caused by the fact

that interim audit reports are released during the year and they contain data about internal

control difficulties or potential problems (Solomon, June 25, 2006, Wall Street Journal).

51

For this reason, there is a really high likelihood that at the date of the official disclosure

regarding material weaknesses in the internal control system, the company‟s stock value

already reflects the uncertainty of the internal control over financial reporting.

Probably this is why the final result of this thesis shows no influence by the

announcement of the material weaknesses in the stock value market.

The same consideration can be applied in the relation between announcements of material

control weaknesses over financial reporting, stock price variation and company size. In

fact the study of the three different size categories illustrates that the effects on auditors‟

disclosures of material control weaknesses are largely insignificant.

A different observation must be highlighted concerning the reaction of the stock exchange

market in relation to the type of industry.

Despite the fact that in six industries the research suggests little or no influence by the

announcement of material weaknesses in the stock price variation, the study demonstrates

also a direct negative correlation between the disclosures of material control weaknesses

and stock market value in three categories: automotive and transport, energy and utilities,

media.

This research could be continued in future by producing further tests over new audit

opinions and using different statistical tools. Furthermore, the results of this final

dissertation could be utilized to extend the investigation about the relation between

different types of industries and market reactions to the disclosures of material

weaknesses.

52

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Risk Management, Wiley.

Alan D. Morrison, 2004, Sarbanes Oxley, Corporate Governance and Operational Risk,

Sarbanes-Oxford Seminar, University of Oxford.

Barbara Pacini & Meri Raggi, 2005, Statistica per l‟analisi operativa dei dati, Feltrinelli.

Cohen, Daniel A., Aiyesha Dey, and Thomas Z. Lys, 2005, Trends in earnings

management and informativeness of earnings announcements in the pre- and post-

Sarbanes Oxley periods, Working paper, New York University.

Compliance Week, www.complianceweek.com.

Deloitte Intranet, www.deloitteresources.com.

Financial Accounting Standards Board Statement No. 5, Accounting for Contingencies

("FAS No. 5"), Deloitte FAQ, 2005.

Financial Executive International (FEI), 2004. Section 404 costs survey.

Financial Reporting Council, 2004, The Turnbull guidance as an evaluation framework

for the purposes of Section 404(a) of the Sarbanes-Oxley Act.

Guy P. Lander, 2004, What is Sarbanes-Oxley? Mc Graw Hill.

KPMG LLP, 2004. Sarbanes-Oxley Section 404: An overview of the PCAOB‟s

requirements.



53

Holmstrom, B. and S. Kaplan, 2003. The state of U.S. Corporate governance: What‟s

right and what‟s wrong? Journal of Applied Corporate Finance 15, 8-20.

Leftwich, R., 1981. Evidence of the impact of mandatory changes in accounting

principles on corporate loan agreements. Journal of Accounting and Economics 3, 3-36.

Li, H., M. Pincus, and S. Rego, 2004. Market reaction to events surrounding the

Sarbanes-Oxley Act of 2002. Working paper, University of Iowa.

Michael F. Holt, 2006, The Sarbanes-Oxley Act: Overview and Implementation

Procedures Manual, CIMA Publishing.

NYSE, www.nyse.com.

Protiviti Inc., 2003, Guide to the Sarbanes-Oxley Act: Internal Control Reporting

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Robert A Prentice, 2004, Guide to the Sarbanes-Oxley Act: What Business Needs to

Know Now That it is Implemented, South-Western College/West.

Robert Charles Clark, 2005, Corporate governance changes in the wake if the Sarbanes

Oxley Act, Discussion Paper, University of Harvard.

Scott Green, 2004, Sarbanes-Oxley and the Board of Directors: Techniques and Best

Practices for Corporate Governance, Wiley.

State University of New York, http://www.oswego.edu/

Zhang, Economic Consequences of the Sarbanes-Oxley Act, 2005, Working Paper,

University of Rochester.

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events:



http://www.protivity.com/

http://www.oswego.edu/

54

Burns, J. and M. Schroeder, 2002. SEC Proposes Rules to Tighten Companies‟ Financial

Controls. Wall Street Journal, October 17, 2002.

Bryan-Low, 2003. Securities Threat: Bush Crackdown on Business Fraud Signals New

Era. Wall Street Journal, October 08, 2003.

Day, K. and A.B. Crenshaw, 2002. SEC, Accounting Firms Redrafting Audit Rules;

Agency Chairman Draws Fire for Role in Effort. The Washington Post, January 16, 2002.

Day, K. and K. Williams, 2002. CEO Deadline Brings Some Restatements; Accounting

Certifications Overload SEC Staff. The Washington Post, August 15, 2002.

Hamburger, T., 2002. House Committee Postpones Vote on Oversight of Auditors. Wall

Street Journal, April 12, 2002.

Hilzenrath, D.S., 2002. Hill Begins Search for Compromise on Accounting Rules. The

Washington Post, July 20, 2002.

Hilzenrath, D.S. and H. Dewar, 2002. Senate Votes 97-0 TO Rein In Firms; Bill Targets

Auditors and Executives. The Washington Post, July 16, 2002.

Hilzenrath, D.S., J. Weisman, and J. Vandehei, 2002. How Congress Rode a „Storm‟ to

Corporate Reform. The Washington Post, July 28, 2002.

Hitt, Gregg, 2002. Democrats in Senate Unite on Accounting-Overhaul Bill. Wall Street

Journal, June 11, 2002.

Norris, F., 2004. Too Much Regulation? Corporate Bosses Sing the Sarbanes-Oxley

Blues. New York Times, January 23, 2004.

55

Schroeder, M., 2002. Lawmakers Plan More Financial Oversight – Accounting Industry

Faces Stepped-up Regulation and Limits on Services. Wall Street Journal, February 12,

2002.

Schroeder, M., 2002. Senate Panel Seeks Sweeping Change for Auditors. Wall Street

Journal, March 7, 2002.

Schroeder, M., 2002. The Economy: Congress Seeks Harsher Penalties For Violations of

Accounting Laws. Wall Street Journal, April 23, 2002.

Schroeder, M., 2003. SEC proposes Rules to Strengthen Boards. Wall Street Journal,

January 9, 2003.

Solomon, D., 2003. Fraud Detector: SEC Sets a New Rule Aimed at Companies‟ Internal

Controls. Wall Street Journal, May 28, 2003.

Solomon, D., 2006. Why does material weaknesses do not crash the market? Wall Street

Journal, June 25, 2006.

VandeHei, J., 2002. House GOP‟s Leaders Fight Audit Plan; Lawmakers Seek to Dilute

Some Senate-Passed Reforms. The Washington Post, July 17, 2002.

VandeHei, J. and D.S., Hilzenrath, 2002. Hill Leaders Agree on Corporate Curbs; Attack

on Fraud Includes Auditing Control and Jail Terms. The Washington Post, July 25, 2002.

Wallison, P., 2003. Blame Sarbanes-Oxley. Wall Street Journal, September 3, 2003.

56

APPENDICES

Appendix 1: Share price analysis per each selected company over a period of six months.

Preliminary work: Share price analysis per each selected company over a period of six months

Company Exch. Ticker Share price analisys over a period of six months

ABM INDUSTRIES INC NYSE ABM

AES CORP NYSE AES

AIRTRAN HOLDINGS INC NYSE AAI

ALLION HEALTHCARE INC Nasdaq ALLI

AMERICA SERVICE GROUP INC NASDAQ ASGR

BANK OF AMERICA CORP NYSE BAC

BELL INDUSTRIES INC AMEX BI

BIOSCRIP, INC. NASDAQ BIOS

BOWNE & CO INC NYSE BNE

BRADLEY PHARMACEUTICALS INC NYSE BDY

CACHE INC NASDAQ CACH

CAPITAL SENIOR LIVING CORP NYSE CSU

CASTLE A M & CO AMEX CAS

CDI CORP NYSE CDI

CERIDIAN CORP NYSE CEN

CHESAPEAKE CORP NYSE CSK

CHICAGO BRIDGE & IRON CO N V NYSE CBI

CNA FINANCIAL CORP NYSE CNA

CORNING INC NYSE GLW

Source of stock price:

NYSE (www.nyse.com)

Source of the list of companies:

Compliance Week (www.complianceweek.com)

ABM.xls

AES.xls

AAI.xls

ALLI.xls

ASGR.xls

BAC.xls

BI.xls

BIOS.xls

BNE.xls

BDY.xls

CACH.xls

CSU.xls

CAS.xls

CDI.xls

CEN.xls

CSK.xls

CBI.xls

CNA.xls

GLW.xls

57



CROSS A T CO AMEX PRZ

CROWN MEDIA HOLDINGS INC NASDAQ CRWN

CT COMMUNICATIONS INC NASDAQ CTCI

DEVCON INTERNATIONAL CORP Nasdaq DEVC

DRESSER-RAND GROUP INC. NYSE DRC

DYNEGY INC NYSE DYN

EMS TECHNOLOGIES INC NASDAQ ELMG

EVCI CAREER COLLEGES HOLDING CORP Nasdaq EVCI

GENERAL GROWTH PROPERTIES INC NYSE GGP

GENERAL MOTORS CORP NYSE GM

H&R BLOCK INC NYSE HRB

HEMISPHERX BIOPHARMA INC AMEX HEM

HIGHWOODS PROPERTIES INC NYSE HIW

HOLLINGER INTERNATIONAL INC NYSE HLR

INPUT OUTPUT INC NYSE IO

KANSAS CITY SOUTHERN NYSE KSU

KROGER CO NYSE KR

LANDAMERICA FINANCIAL GROUP INC NYSE LFG

LAUREATE EDUCATION, INC. NASDAQ LAUR


NYSE (www.nyse.com)



ABM.xlsAES.xlsAAI.xlsALLI.xlsASGR.xlsBAC.xlsBI.xlsBIOS.xlsBNE.xlsBDY.xlsCACH.xlsCSU.xlsCAS.xlsCDI.xlsCEN.xlsCSK.xlsCBI.xlsCNA.xlsGLW.xlsPRZ.xls

CRWN.xls

CTCI.xls

DEVC.xls

DRC.xls

DYN.xls

ELMG.xls

EVCI.xls

GGP.xls

GM.xls

HRB.xls

HEM.xls

HIW.xls

HLR.xls

IO.xls

KSU.xls

KR.xls

LFG.xls

LAUR.xls

58



LEAP WIRELESS INTERNATIONAL INC NASDAQ LEAP

LENNOX INTERNATIONAL INC NYSE LII

LHC GROUP, INC NASDAQ LHCG

LIGAND PHARMACEUTICALS INC NASDAQ LGND

LINN ENERGY, LLC NASDAQ LINE

MAGELLAN HEALTH SERVICES INC NASDAQ MGLN

MAX RE CAPITAL LTD NASDAQ MXRE

MEADOW VALLEY CORP NASDAQ MVCO

MODTECH HOLDINGS INC NASDAQ MODT

MOLSON COORS BREWING CO NYSE TAP

MOVIE GALLERY INC NASDAQ MOVI

MUELLER INDUSTRIES INC NYSE MLI

NATURAL HEALTH TRENDS CORP Nasdaq BHIP

NAUTILUS, INC. NYSE NLS

OM GROUP INC NYSE OMG

ONEOK INC NYSE OKE

ORCHID CELLMARK INC Nasdaq ORCH

OVERSTOCK.COM, INC NASDAQ OSTK

PACIFIC CMA INC AMEX PAM


NYSE (www.nyse.com)



ABM.xlsAES.xlsAAI.xlsALLI.xlsASGR.xlsBAC.xlsBI.xlsBIOS.xlsBNE.xlsBDY.xlsCACH.xlsCSU.xlsCAS.xlsCDI.xlsCEN.xlsCSK.xlsCBI.xlsCNA.xlsGLW.xlsPRZ.xlsCRWN.xlsCTCI.xlsDEVC.xlsDRC.xlsDYN.xlsELMG.xlsEVCI.xlsGGP.xlsGM.xlsHRB.xlsHEM.xlsHIW.xlsHLR.xlsIO.xlsKSU.xlsKR.xlsLFG.xlsLAUR.xlsLEAP.xls

LII.xls

LHCG.xls

LGND.xls

LINE.xls

MGLN.xls

MXRE.xls

MVCO.xls

MODT.xls

TAP.xls

MOVI.xls

MLI.xls

BHIP.xls

NLS.xls

OMG.xls

OKE.xls

ORCH.xls

OSTK.xls

PAM.xls

59



PAXSON COMMUNICATIONS CORP AMEX ION

PERFICIENT INC NASDAQ PRFT

PETROLEUM DEVELOPMENT CORP NASDAQ PETD

POPULAR INC NASDAQ BPOP

RETAIL VENTURES INC NYSE RVI

ROCK OF AGES CORP Nasdaq ROAC

RUSS BERRIE & CO INC NYSE RUS

SM&A Nasdaq WINS

STERLING CONSTRUCTION CO INC NASDAQ STRL

STONEMOR PARTNERS LP Nasdaq STON

SUPERIOR INDUSTRIES INTERNATIONAL INC NYSE SUP

TECUMSEH PRODUCTS CO NASDAQ TECUA

TEREX CORP NYSE TEX

TITANIUM METALS CORP NYSE TIE

USA MOBILITY, INC Nasdaq USMO

UTSTARCOM INC NASDAQ UTSI

VALHI INC NYSE VHI

WORLD FUEL SERVICES CORP NYSE INT

ZAPATA CORP NYSE ZAP


NYSE (www.nyse.com)



ABM.xlsAES.xlsAAI.xlsALLI.xlsASGR.xlsBAC.xlsBI.xlsBIOS.xlsBNE.xlsBDY.xlsCACH.xlsCSU.xlsCAS.xlsCDI.xlsCEN.xlsCSK.xlsCBI.xlsCNA.xlsGLW.xlsPRZ.xlsCRWN.xlsCTCI.xlsDEVC.xlsDRC.xlsDYN.xlsELMG.xlsEVCI.xlsGGP.xlsGM.xlsHRB.xlsHEM.xlsHIW.xlsHLR.xlsIO.xlsKSU.xlsKR.xlsLFG.xlsLAUR.xlsLEAP.xlsLII.xlsLHCG.xlsLGND.xlsLINE.xlsMGLN.xlsMXRE.xlsMVCO.xlsMODT.xlsTAP.xlsMOVI.xlsMLI.xlsBHIP.xlsNLS.xlsOMG.xlsOKE.xlsORCH.xlsOSTK.xlsPAM.xlsION.xls

PRFT.xls

PETD.xls

BPOP.xls

RVI.xls

ROAC.xls

RUS.xls

WINS.xls

STRL.xls

STON.xls

SUP.xls

TECUA.xls

TEX.xls

TIE.xls

USMO.xls

UTSI.xls

VHI.xls

INT.xls

ZAP.xls

thesis_effects of material weakness on stock exchange market

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