1. 1
Stock Price Reactions to Accounting Fraud
The University of Tennessee
Undergraduate Thesis
Cynthia Bynum
30 April 2012
Global Leadership Scholars
Advisor: Dr. Deborah Harrell

2. 2
Abstract
This paper documents a four-way analysis of the stock price reactions to lawsuits brought against
a company for corporate misconduct. The four-way analysis interprets the stock price reactions
to lawsuit filings both pre- and post- Sarbanes Oxley Act of 2002 (SOX), and class action
lawsuits and non class action lawsuits. The reactions are based on the announcement date with a
ten-day window both before and after the date. This is based on the assumption that information
can be leaked to the media or stockholders before the announcement day and in order to grasp
the actual affect for days after the announcement day. With this research, I expect to find a
negative stock reaction in all companies when an announcement of corporate misconduct is
made. This negative reaction will show that shareholders are not as confident of the profitability
or success of that company. It may also serve as society’s punitive damage for the mistrust that it
has placed among its consumers, shareholders, and stakeholders. I also expect to find that
companies facing lawsuits for corporate misconduct post-SOX will experience a more negative
reaction than those pre-SOX. My assumption is based on SOX being a far-reaching reform of
regulatory policies of companies’ business practices. I see this as holding companies to a higher
standard with more regulations and policies to follow. I also expect companies with class action
lawsuits to face a larger negative stock reaction than companies without class action lawsuits. To
be declared a class action lawsuit, many prerequisites and trial hearings are required before it can
legally be entitled as a class action lawsuit. This presumes that the company has wronged a
multitude of stakeholders. Non-class action lawsuits do not have the court hearing as a
prerequisite and may include just one party or individual that has been wronged by the company.
I will run regression analyses on the closing stock prices to test my assumptions.

3. 3
I. Motivation
When deciding in the infinite realm of topics what to conduct my research on for my
thesis, I knew I wanted something intriguing and related to the financial prosperity of businesses.
Corporate misconduct and financial fraud have always been intriguing topics to me. Though, I
find it more interesting the lengths that companies reach to cover any traces of misconduct. This
led me to the curiosity of what happens to companies when they are charged of accounting fraud.
Accounting fraud can be defined in a multiple of ways. Common cases of accounting
fraud include “cooking the books” by hiding large expenses, overstating revenues, overstating
assets, understating liabilities, etc. My research assumes that accounting fraud is any deception
or misleading information released in accounting and financial statements that leads the
company to appear in a healthier financial position than what they actually are. My research does
not focus on any particular type of accounting fraud such as price-fixing or overstating revenues.
Instead, it covers a wide array of accounting fraud.
The framework of my study will be compiled by analyzing thirty-two different
companies accused of accounting fraud. This number is broken down into four different
categories giving the four-way analysis. These categories were selected by a sparked interest of
how price reactions changed both after SOX was passed and if the classification was a class
action lawsuit. These two specifications are important as I can see significant roles that they play
in the business world. When SOX was passed, many new regulations, policies, and rules were
issued to help monitor and facilitate good business practices. It was the biggest reform in
financial reporting since the 1930s (Cahan). So, it would be a great specification to use to
measure how stock prices were affected both before and after the reform. The other stipulation
on my research is class action lawsuits. Class action lawsuits are when a class of people or

4. 4
parties comes together to file a lawsuit against a company who wronged them in the similar
manner. It is common for shareholders to gather and file class action lawsuits against the
company for which they hold shares (Eble). This stipulation also has great significance. Class
action lawsuits have many prerequisites and go through a trial before it is recognized as a class
action lawsuit. This would suggest that with more people being affected and it already being
processed through a court trial that there would be a greater negative reaction to the stock prices.
It would be interesting to study the difference in the stock reactions for companies with class
action lawsuits filed against them and companies without. These two specifications are being
used for comparison of whether they really have an affect on reaction of stock prices when a
company is accused of corporate misconduct.
In the awakening of the twenty first century, America witnessed a widespread of
financial scandals with some of the major influences being Enron and WorldCom. Enron was an
American energy company that was based out of Houston, Texas. During the time period of
Enron’s scandals, it was the seventh largest company in the U.S. (EBSCOhost). In November
1997, Enron began its transactions that enabled it to hide its debts from the public eye. Enron
accomplished this by buying out stakes in a company called JEDI. Enron then sold the stakes to
a firm, which it created called Chewco. Three and a half years later in February 2001, three
critical events happened that caused a decline in stock prices: Arthur Andersen made claims of
dropping Enron as a client, Kenneth Lay stepped down from CEO with Jeffrey Skilling taking
his place, and FORTUNE magazine made claims that Enron was piling on debt while keeping it
hidden from Wall Street (Time U.S. and Time Specials). In August, the newly appointed CEO
Jeffrey Skillings resigned, totaling six senior executives leaving the company within the past
year (Time Specials). From this point until Enron filed what was then the largest bankruptcy in

5. 5
U.S. history on December 2, the scandals of Enron began to unravel quickly. Arthur Andersen
was quick to rid all of their basic documents with Enron, and the Securities Exchange
Commission filed for an inquiry of Enron’s financial statements (Time Specials). The scandals
incurred by Enron led not only to its bankruptcy but also led the Arthur Andersen accounting
firm, one of the five largest in the world, to an early end. Enron shareholders lost nearly $11
billion. Price per share hit an all time high of $90 in mid 2000, then by October 2001 had
plummeted to less than $1 per share. By the time the stock closed the day Enron filed for
bankruptcy, it was only trading for $0.26 (Time Specials). Enron was the US’s largest
bankruptcy until the WorldCom scandals the following year. WorldCom was once US’s second
largest long distance phone company. WorldCom was considered to have a solid business
strategy as they were acquiring a lot of telecommunication companies during the wake of the
technology boom (Moberg). WorldCom went from a Wall Street favorite to a surprising record
bankruptcy. The CEO of WorldCom, Bernie Ebbers, joined the company in 1985 when it was
formerly know as Long-Distance Discount Services (LDDS) (Washington Post). WorldCom,
known for its strategic business plan of making acquisitions, completed three mergers in
1998.One the mergers was with MCI Communications Corporation for $40 billion, making it
the largest merger in history at that time (Washington Post). The company continued to merge,
but it started to draw attention to the Securities and Exchange Commission who requested
information for WorldCom’s accounting procedures in March 2002. Shortly following, credit
ratings were being cut, and CEO Bernie Ebbers resigned in late April. Investigations into
WorldCom’s financials suggest improper reporting dating back to 1999, and the company filed
for bankruptcy protection on July 21, 2002 (Washington Post). WorldCom became the largest
bankruptcy in US history (Beltran).

6. 6
These record setting scandals and bankruptcies are what gave push for the passing of
SOX. The changes that the US faced were swift, and the Public Company Oversight Board
(PCAOB) laid down stiff rules for the financial reporting and auditing for companies (Cahan).
Even those these regulations were issued, it does not prevent another major accounting scandal.
However, with these changes in regulations, we can compare companies before and after to see
if it does affect companies (Cahan).
II. Related Research
The Sarbanes-Oxley Act of 2002
The Sarbanes Oxley Act of 2002 (SOX) was Congress’ effort to respond to corporate
scandals and used to restore confidence in the stock markets. Again, it was the largest
accounting reform in the US since the 1930s. It was nothing to be taken lightly. After a wave of
scandals was uncovered in the start of the 21st
Century, Congress had to enact provisions to
protect shareholders and the general public from fraudulent practices. These regulations covered
a range of topics and people: Public Company Accounting Oversight Board, Auditor
Independence, Corporate Responsibility, Enhanced Financial Disclosures, etc. To help explain
the strict regulations placed on companies, here are a couple of examples of rules set in place by
SOX:
Sec. 301‘‘(2) RESPONSIBILITIES RELATING TO REGISTERED PUBLIC
ACCOUNTING FIRMS.—The audit committee of each issuer, in its capacity as a
committee of the board of directors, shall be directly responsible for the appointment,
compensation, and oversight of the work of any registered public accounting firm
employed by that issuer (including resolution of disagreements between management and

7. 7
the auditor regarding financial reporting) for the purpose of preparing or issuing an
audit report or related work, and each such registered public accounting firm shall
report directly to the audit committee.”
Sec. 401 “(b) COMMISSION RULES ON PRO FORMA FIGURES.—Not later than 180
days after the date of enactment of the Sarbanes-Oxley Act of 2002, the Commission shall
issue final rules providing that pro forma financial information included in any periodic
or other report filed with the Commission pursuant to the securities laws, or in any public
disclosure or press or other release, shall be presented in a manner that—
(1) does not contain an untrue statement of a material fact or omit to state a material fact
necessary in order to make the pro forma financial information, in light of the
circumstances under which it is presented, not misleading; and
(2) reconciles it with the financial condition and results of operations of the issuer under
generally accepted accounting principles.” (U.S. Securities and Exchange Commission)
In late 2001, American headlines covered the unraveling of the Enron and Andersen
scandals. Closely followed by these were ImClone, Global Crossing, and other similar stories of
companies falsifying their financial records. At first, Congress did little in reaction to these
events. Though, several committees commenced hearings, and several new bills were introduced
to address the recent trend of corporate misconduct. However, at the time, the Senate was under
Democratic control and the Republican Party controlled the House of Representatives. The
differences between these two legislations were so extreme that is appeared that the effort for

8. 8
corporate reform had stalled (Spurzem). During the times that the committees were meeting, two
men, Michael Oxley and Paul Sarbanes, were in the making of a bill to be passed to set
regulations on companies to provide honest representation of financials. In late April 2002, the
House of Representatives passed Representative Michael Oxley’s bill in an attempt to create a
reform and put a stop to the wave of scandals. Shortly after this in June, WorldCom announced
that it had been overstating its earnings for the past fifteen months. This put legislation into full
gear to get a bill passed to stop companies from these scandals. On June 25, Senator Sarbanes
introduced his bill to the full Senate, and it was passed on July 15. The conference committees
that were meeting reconciled the differences between these two bills. They approved the full bill
and named it the Sarbanes-Oxley Act of 2002 on July 24, 2002. The bill became enacted on July
30 when President George W. Bush signed it into law (Digital Pathways).
Although SOX was enacted on July 30, 2002, the complicated bill took over a year to
fully be enforced, ranging from the date it was enacted until December 15, 2003. The bill was
broken into several topics, which were broken into numerous different effective dates.
Examples of these broken down effective dates include:
“Topic 101 (d) Public Company Oversight Board:
Effective Date: SEC determination no later than April 26, 2003”
“Topic 406 Senior Management Code of Ethics:
Effective Date: Final rule issued by the SEC on January 23, 2003. Rule is effective for
fiscal years ending on or after July 15, 2003.” (PricewaterhouseCoopers)

9. 9
Legislation passed SOX in an attempt to protect shareholders and the general public from
companies behaving with corporate misconduct. It was also a warning to companies of the
consequences if caught in their actions. SOX enacted guidelines for how companies should report
their financial statements, limiting the number of loopholes that companies could use to
fraudulently misrepresent their financial performance. SOX also includes the responsibility that
companies have to their employees, shareholders, customers, and the public, in general. A code
of ethics is something else that can be found in SOX. Following the law can be the minimal of
ethics, so it is important for companies to understand that following the law is just the bare
minimum. With these guidelines set in place, companies are held to a much higher standard in
honestly and accurately reporting the financials of their companies. My research will show us if
stock prices were affected by these new regulations set in place. More reform may be a solution if
companies are unaffected by SOX and are still fraudulently depicting the financial statements of
the company.
Class Action Lawsuits
For the other part of my research that I am conducting, I am analyzing whether lawsuits
against companies experienced a larger impact on stock prices if they were class action lawsuits.
A class action lawsuit is defined as a type of lawsuit in which a large group of people
collectively brings a claim against the same defendant. This type of lawsuit is prominent in the
United States in which it was originated (Eble). For my study, I will be comparing the reaction
of stock prices in companies with class action lawsuits versus companies with lawsuits or
allegations that are not class action. Class action lawsuits have many prerequisites and go
through a court process before being declared a class action lawsuit. It is a topic of study

10. 10
because it will be interesting to see if being a class action lawsuit has a bigger negative reaction
to stock prices.
Class action lawsuits tend to be taken more serious as there has already been a court
overseeing the lawsuit, classifying it as class action. There are four prerequisites to class action
lawsuits: 1. The class is so numerous that joinder of all members is impracticable (numerosity);
2. There are questions of law or fact common to the class (commonality); 3. The claims or
defenses of the representative parties are typical of the claims or defenses of the class
(typicality); and 4. The representative parties will fairly and adequately protect the interests of
the class (adequacy of representativeness) (Rule 23). In a short time after a person sues as a
class representative, the court will determine by order whether to certify the action as a class
action. The order will determine the type of class and appointing the class counsel. After the
class is issued, defined and appointed counsel, the order may be altered or amended before final
judgment. All members of a class may be identified and offered a notice after the final
judgment of the class is made. The notice should include the nature of the action, the definition
of the class certified, the class claims, the right to an attorney, the right to seek exclusion from
the class and the protocol for this exclusion, and the binding effect of a class judgment on
members.
Some of the top class action lawsuits include AOL Time Warner who settled for $2.5
billion, Tyco Telecommunications who settled for $3.2 billion, Exxon who was ruled to pay $5
billion (late reduced to $500 million), WorldCom who settled for $6.2 billion, and Enron who
settled for $7.2 billion (American Greed). All of these companies had class action lawsuits filed
against the after a court found that they had met all of the prerequisites and thought it was a
viable reason. The majority of lawsuits are settled outside of the court system either through

11. 11
negotiation, mediation, or arbitration (Obringer). It will not be common to find lawsuits make it
through the entire court process. An alternative settlement seems enticing to many companies,
as it would save much time and a lot of court expenses.
Class action lawsuits must follow procedural law. There are many steps and actions that
must be taken before a class action lawsuit is bind by law. With the steps taken, much time must
be allocated to define the class and make final judgment of the class and their lawsuit. This must
be taken into consideration when judging the effects of the stock prices. My research will show
if class action lawsuit cases have a larger affect on stock prices.
III. Hypothesis
After further research into the stipulations and guidelines of SOX, I expect to find that
the sixteen companies with allegations of accounting fraud post-SOX will experience larger
negative stock effects than those of the sixteen pre-SOX. More so, I expect to find the companies
with class action lawsuits filed against them to experience a greater negative stock price reaction
as compared to those companies without class action lawsuits. Class action lawsuits go through a
lengthier litigation process and have a more sever punishment for companies. This gives
adherence as to why I expect this sample to experience a more negative stock price reaction.
IV. Methodology
For
my
topic,
I
am
researching
the
stock
price
reaction,
if
any,
that
occurred
to
thirty-­‐
two
companies
once
an
allegation
was
lodged
against
the
company
for
accounting
fraud.
My
research
consisted
of
collecting
a
significant
amount
of
primary
data.
The
thirty-­‐
two
companies
consist
of
sixteen
companies
whose
litigations
occurred
before
the

12. 12
Sarbanes-­‐Oxley
Act
(SOX)
of
2002
and
sixteen
companies
with
litigations
occurring
after
SOX
was
in
full
effect.
Like
many
large
reforms,
SOX
was
broken
down
into
several
topics,
covering
different
aspects
of
the
financial
reporting
process.
These
different
topics
had
a
wide
array
of
dates
in
which
the
bill
was
to
be
enacted,
even
though
it
was
signed
into
law
on
July
30,
2002.
These
dates
of
enactment
ranged
from
July
30,
2002
until
December
15,
2003.
Chart
1
gives
a
more
visual
aid
for
the
enactment
dates.
For
this
reason,
the
companies
chosen
for
the
pre-­‐
and
post-­‐
SOX
study
were
all
chosen
with
announcement
dates
of
lawsuit
either
prior
to
July
2002
or
after
the
year
ending
2003.
This
would
yield
all
pre-­‐SOX
companies
to
have
announcement
dates
prior
to
July
1,
2002
and
all
post-­‐SOX
companies
to
have
announcement
dates
after
January
1,
2004.
This
stipulation
is
to
prevent
complication
and
confusion
for
the
pre-­‐
and
post-­‐SOX
companies.
Then,
to
further
my
analysis,
of
the
sixteen
companies
both
pre-­‐
and
post-­‐
SOX,
they
were
divided
into
eight
class
action
lawsuits
and
eight
non-­‐class
action
lawsuits.
This
will
give
me
a
four-­‐way
analysis
in
comparing
effects
of
stock
prices.
There
are
class
action
lawsuits
versus
non-­‐
class
action
lawsuits
and
pre-­‐SOX
versus
post
-­‐SOX.

13. 13
Chart
1.
Outlined
is
the
number
of
topics
that
became
effective
on
various
dates
ranging
from
July
31,
2002
until
December
15,
2003.
This
does
not
include
all
topics
in
the
Sarbanes-­‐Oxley
Act
of
2002.
Some
topics
of
the
Act
were
not
given
an
effective
date.
The
dates
listed
are
not
actual
effective
dates,
but
rather
month
end
dates,
so
it
encompasses
the
number
of
topics
that
became
effective
during
that
given
month.
My
sample
data
consists
of
thirty-­‐two
companies
in
total
that
faced
allegations
for
corporate
misconduct.
For
the
class
action
lawsuits,
I
used
the
class
action
lawsuit
filings
off
Stanford’s
securities
website,
http://securities.stanford.edu.
Under
the
filings
section,
I
randomly
selected
sixteen
companies,
eight
whose
litigation
dates
were
before
July
2002
and
eight
whose
litigation
dates
were
after
January
1,
2004.
Companies
that
were
randomly
selected
but
did
not
meet
the
requirements
were
thrown
out
and
another
company
was
chosen
at
random.
The
companies
chosen
had
to
meet
the
requirements
of
being
a
publically
traded
company,
having
historical
stock
prices
available,
and
having
stock
price
returns
data
publically
available
for
the
event
window
occurring
in
the
set
pre-­‐

14. 14
or
post-­‐SOX
time
frame.
To
account
for
bias,
another
specification
added
on
to
my
empirical
research
was
that
I
have
no
prior
knowledge
of
the
company.
Of
the
two
hundred
eighty-­‐six
companies
posted
on
Stanford’s
securities
website,
only
seventeen
companies
met
the
requirements,
eight
post-­‐SOX
and
nine
pre-­‐SOX.
This
explains
my
small
sample
size,
as
I
was
very
limited
to
the
companies
that
met
the
qualifications
for
my
research.
My
randomized
selection
was
based
off
blindly
pointing
at
a
company
and
testing
to
see
if
it
met
the
specifications.
If
it
did
not,
then
it
was
crossed
out
and
another
company
was
selected.
Chart
2
identifies
the
sixteen
class
action
lawsuits
companies,
both
pre-­‐
and
post-­‐
SOX
that
were
selected
for
my
study.
Chart
2.
Identified
are
the
sixteen
companies
selected
as
the
class
action
lawsuits
sample
of
my
research.
For
the
non-­‐class
action
lawsuits,
I
used
the
LexisNexis
Academic
database.
The
same
requirements
were
applied
to
non-­‐class
action
lawsuits
categories
as
well:
to
account
for
bias,
I
must
have
no
previous
knowledge
of
the
company,
it
must
be
a
publically
traded
company,
have
historical
stock
prices
available,
and
have
an
announcement
date
in
the
set

15. 15
pre-­‐
or
post-­‐SOX
time
frame.
The
companies
that
met
these
requirements
were
then
crossed
check
with
the
Stanford
database
to
ensure
that
they
did
not
fall
into
the
class
action
lawsuit
sample.
My
selection
process
for
this
part
of
my
sample
was
still
random,
but
it
was
conducted
in
a
different
manner.
Using
LexisNexis,
I
used
key
terms
to
search
all
major
publications
for
companies
accused
of
accounting
fraud.
Key
terms
used
to
search
for
companies
include:
accounting
fraud,
financial
fraud,
corporate
misconduct,
accounting
scandals,
price-­‐fixing,
fraud,
and
financial
scandals.
Again,
I
randomly
selected
companies
and
tested
the
criteria.
If
the
company
did
not
meet
the
qualifications,
then
it
was
thrown
out,
and
the
selection
process
continued.
Through
this
process,
I
identified
one
hundred
forty-­‐three
companies.
Only
twenty
companies
met
the
qualifications
for
this
sample,
and
sixteen
were
randomly
selected.
Chart
3
lists
the
companies
chosen
for
the
non-­‐class
action
lawsuit
sample.
Chart
3.
Identified
are
the
sixteen
companies
selected
as
the
non-­‐class
action
lawsuits
sample
of
my
research

16. 16
The
announcement
date
for
my
samples
is
the
date
in
which
the
allegations
were
made
public.
To
encompass
a
range
of
possibilities
to
capture
stock
price
reactions,
I
will
use
an
event
window
period.
This
includes
ten
days
prior
to
the
announcement
date
to
account
for
early
leakage
to
the
media
or
shareholders
and
ten
days
after
the
announcement
date
to
capture
the
actual
public
reaction
to
the
allegations.
This
creates
a
twenty-­‐one
day
event
window,
including
t=o
as
the
announcement
date.
Prior
to
the
event
window,
I
pulled
a
year
worth
of
stock
prices
to
be
able
to
calculate
the
normal,
expected
return.
Using
a
regression
analysis,
the
assumed
stock
price
for
the
announcement
day
can
be
calculated.
It
can
then
be
compared
to
the
actual
stock
price
for
the
announcement
day.
This
comparison
will
allow
the
analysis
of
the
actual
shock,
if
any,
of
the
stock
prices
on
the
date
the
allegation
was
announced.
For
the
regression
analysis,
the
closing
prices
have
been
pulled
from
the
Bloomberg
Database.
Yahoo
Finance
proved
to
be
an
unreliable
and
inaccurate
source
of
data
for
my
research.
It
was
my
original
source
of
stock
price
information,
but
after
providing
inaccurate,
insufficient,
or
unreliable
data
for
specific
stocks,
it
has
become
a
mere
checkpoint
for
certain
stock
prices.
Bloomberg
has
provided
all
of
the
closing
stock
prices
and
can
account
for
dividends
paid.
The
date
of
the
first
public
announcement
of
accounting
fraud
will
be
set
as
t=0.
The
ten
days
prior
to
the
announcement
date
will
be
t=-­‐10,
t=-­‐9…
with
t=-­‐1
being
the
day
before
the
announcement
date.
The
ten
days
after
the
announcement
date
will
be
t=1,
t=2…
with
t=10
being
the
tenth
day
after
the
announcement
was
made
public.
Using
the
Brown

17. 17
and
Warner
(1985)
standard
event
study
methodology,
I
was
able
to
capture
the
stock
price
reactions
during
the
event
window
of
the
first
public
announcement.
I
was
able
to
examine
the
single
day
abnormal
returns,
ARt
and
the
multi-­‐day
cumulative
abnormal
return,
CAR(a,b),
where
a
and
b
indicate
days
that
are
relative
to
t=0.
For
sufficient
regression
results,
there
must
be
a
minimum
of
150
days
prior
to
the
event
window.
For
my
study,
250
days
were
used,
giving
roughly
a
year’s
worth
of
daily
returns
prior
to
the
event
window.
Using
the
250,
t=-­‐11
to
t=-­‐260,
days
prior
to
the
event
window,
I
calculated
the
Beta,
β,
and
the
Intercept,
α,
using
a
least
square
regression
of
€
rit
and
€
rmt
to
use
in
the
equation
to
define
the
abnormal
return.
The
Brown
and
Warner
(1985)
market
model
used
for
abnormal
returns
for
firm
i
is
defined
as
€
Rit = rit − αi − βirmt
(1)
where
€
rit
represents
the
firm
i’s
common
stock
on
day
t,
and
€
rmt
is
the
return
on
the
Standard
and
Poor’s
(S&P
500)
return
on
the
index
of
day
t.
To
calculate
the
average
abnormal
return
for
each
day
t
in
the
event
window,
it
was
computed
as
€
ARt =
1
Nt
Rit
i=1
Nt
∑
#
$
%%
&
'
((
(2)
where
€
Nt
represents
the
number
of
firms
in
the
average
on
day
t.
The
cumulative
average
return
was
calculated
as
∑=
=
b
at
tARbaCAR ),(
(3)
where
a
and
b
are
days
relative
to
the
announcement
date.

18. 18
V.
Data
and
Results
Table
1.
The
daily
abnormal
returns
during
the
event
window
are
based
on
the
Beta
and
Intercept
over
the
period
-­‐260
days
to
-­‐11
days
relative
to
the
event
period
of
the
announcement
date.
This
table
lists
the
daily
abnormal
returns
during
the
event
window
for
the
eight
companies
in
the
post-­‐SOX
and
class
action
lawsuit
category
and
the
average.
Table
2.
The
daily
abnormal
returns
during
the
event
window
are
based
on
the
Beta
and
Intercept
over
the
period
-­‐260
days
to
-­‐11
days
relative
to
the
event
period
of
the
announcement
date.
This
table
lists
the
daily
abnormal
returns
during
the
event
window
for
the
eight
companies
in
the
pre-­‐SOX
and
class
action
lawsuit
category
and
the
average.

19. 19
Table
3.
The
daily
abnormal
returns
during
the
event
window
are
based
on
the
Beta
and
Intercept
over
the
period
-­‐260
days
to
-­‐11
days
relative
to
the
event
period
of
the
announcement
date.
This
table
lists
the
daily
abnormal
returns
during
the
event
window
for
the
eight
companies
in
the
post-­‐SOX
and
non-­‐class
action
lawsuit
category
and
the
average.
Table
4.
The
daily
abnormal
returns
during
the
event
window
are
based
on
the
Beta
and
Intercept
over
the
period
-­‐260
days
to
-­‐11
days
relative
to
the
event
period
of
the
announcement
date.
This
table
lists
the
daily
abnormal
returns
during
the
event
window
for
the
eight
companies
in
the
pre-­‐SOX
and
non-­‐class
action
lawsuit
category
and
the
average.

20. 20
Table
5.
Cumulative
average
abnormal
returns
are
calculated
using
the
Brown
and
Warner
(1985)
methodology.
The
CARs
are
measured
relative
to
the
announcement
date
of
t=0.
The
whole
sample
includes
all
thirty-­‐two
companies
from
the
four
different
categories.
Post-­‐Sarbanes-­‐Oxley
2002
includes
sixteen
companies,
eight
class
action
lawsuits
and
eight
non-­‐class
action
lawsuits.
Then
the
class
action
lawsuits
and
non-­‐class
action
lawsuits
make
up
the
fourth
and
fifth
category.
Then,
all
four
categories
are
separated
for
comparison.

21. 21
After
calculating
the
abnormal
returns
and
the
cumulative
average
abnormal
returns,
my
results
suggest
that
there
is
no
difference
between
pre-­‐SOX
(-­‐0.04017)
and
post-­‐SOX
(-­‐0.04778).
However,
there
does
appear
to
be
a
difference
between
Post-­‐SOX
class
action
lawsuits
(.007713)
and
pre-­‐SOX
class
action
lawsuits
(-­‐0.00461)
and
also
between
class
action
lawsuits
(0.001552)
and
non-­‐class
action
lawsuits
(-­‐0.0895).
Although,
it
should
be
noted
that
given
my
small
sample
size
of
only
thirty-­‐
two
firms,
I
am
unable
to
test
if
these
differences
are
statistically
significant.
Given
the
time
frame
that
I
used
(1997-­‐2011),
there
were
not
enough
companies
that
met
the
data
qualifications.
Through
much
research,
it
has
become
apparent
that
in
order
to
encompass
enough
companies
for
my
research,
my
time
frame
would
need
to
be
altered
and
extended.
Other
studies
such
as
that
done
by
Murphy,
Shreives,
and
Tibbs
encompass
394
companies
using
the
time
frame
from
1982-­‐1996.
My
specification
to
reduce
bias
by
eliminating
companies
with
previous
knowledge
also
limited
my
research
sample
size.
After
compiling
my
research
and
analyzing
the
data,
my
hypothesis
has
been
rejected.
I
hypothesized
that
the
firms
with
announcement
dates
post-­‐SOX
would
have
a
larger
negative
stock
effect
than
those
with
announcement
dates
before
SOX.
I
also
concluded
that
companies
with
class
action
lawsuits
would
experience
greater
negative
effects
than
companies
with
class
action
lawsuits.
However,
as
my
results
show,
there
appears
to
be
no
substantial
difference
between
pre-­‐SOX
and
post-­‐SOX
companies.
And
contrary
to
my
hypothesis,
the
companies
with
non-­‐class
action
lawsuits
appear
to
experience
a
larger
negative
stock
effect.
Again,
I
am
unable
to
test
if
this
is
significant
due
to
the
small
sample
size.
Future
research
can
be
conducted
to
help
explain
my
findings
and
test
for
the
significance
of
the
differences
in
the
cumulative
average
returns.

22. 22
VI.
Future
Research
Further
research
would
be
needed
to
maybe
help
explain
why
class
action
lawsuits
saw
a
much
less
effect
than
the
non-­‐class
action
lawsuits
category.
One
reason
may
be
due
to
bankruptcy
filings
prior
to
the
announcement
date,
which
would
cause
a
large
negative
effect
at
the
bankruptcy
announcement.
This
could
take
away
from
the
negative
effect
of
the
accounting
fraud.
Other
factors
that
could
contribute
to
my
findings
could
be
the
size
of
the
company,
the
number
of
stockholders,
the
number
of
shares
outstanding,
the
industry
of
the
company,
the
revenues
of
the
company,
the
type
of
the
accounting
fraud,
etc.
I
would
like
to
conduct
future
research
into
companies
to
see
if
insider
secrets
or
bankruptcy
played
a
significant
role
the
effects
of
the
stock
prices.
Some
of
the
companies
included
in
my
samples
faced
large
negative
effects
after
filing
for
bankruptcy,
which
usually
occurred
a
few
months
before
the
announcement
of
accounting
fraud
was
made.
This
factor
could
have
made
a
huge
impact
on
why
there
was
not
such
a
dramatic
effect
when
the
fraud
was
announced.
Another
factor
could
have
been
that
the
major
stockholders
in
the
company
could
have
been
informed
prior
to
the
allegations
and
started
to
sell
their
stock.
This
could
have
a
more
gradual
effect
on
the
price
of
the
stock
as
opposed
to
the
immediate
effect
expected
when
the
announcement
is
made.
Further
research
needs
to
be
conducted
to
determine
if
these
factors
played
a
meaningful
role
in
the
stock
price
reactions.
Since
my
sample
size
was
rather
small,
future
research
would
need
to
be
conducted
with
a
larger
sample
size
to
see
if
the
differences
are
statistically
significant.
With
a
larger
sample
size,
given
a
larger
scale
of
time,
different
results
may
be
concluded,
but
the

23. 23
difference
can
be
test
for
statistical
significance.
I
would
suggest
analyzing
a
minimum
of
thirty
companies
in
each
classification
group
in
order
for
it
to
render
significant
results.
Future
research
can
also
be
conducted
to
test
to
see
if
the
industry
plays
a
significant
role
in
the
stock
price
reactions.
In
my
research,
I
found
that
many
companies
were
either
in
the
energy,
communications,
or
health
industry.
Therefore,
it
would
be
interesting
to
see
if
certain
industries
experience
occurrences
of
accounting
fraud
more
frequently
and
if
particular
industries
experience
a
larger
negative
stock
effect.
It
would
be
interesting
to
find
out
if
the
public
is
more
involved
through
stocks
with
choice
industries
as
opposed
to
other
industries.
VII.
Conclusion
There
were
some
limitations
to
my
research
that
may
have
affected
my
results.
Due
to
my
specific
qualifications
for
companies
for
my
research,
I
was
only
able
to
use
a
sample
size
of
thirty-­‐two.
This
sample
size
is
not
large
enough
to
test
if
the
differences
in
my
results
are
significant
or
not.
With
such
a
small
sample
size,
any
one
company’s
data
could
have
skewed
all
of
the
data
for
that
particular
category.
Therefore,
future
research
conducted
on
this
topic
should
definitely
change
the
qualifications
to
implement
more
companies
in
the
research
and
further
be
able
to
encompass
and
capture
the
stock
price
reactions.
My
research
also
did
not
account
for
factors
such
as
bankruptcy,
company
size,
number
of
shareholders
and
shares
outstanding,
and
some
other
factors
that
might
have
affected
the
results
of
my
data.
My
hypothesis
was
proven
wrong,
as
my
results
concluded
that
the
implementation

24. 24
of
Sarbanes-­‐Oxley
2002
did
not
affect
the
stock
price
reactions.
It
also
concluded
that
non-­‐
class
action
lawsuits
experienced
a
larger
negative
stock
effect
than
class
action
lawsuits,
which
is
completely
opposite
of
what
I
would
argue.
An
analysis
of
my
research
suggests
that
companies
may
not
experience
as
large
of
punitive
damages
from
stockholders
than
one
might
think.
I
plan
to
extend
my
study
in
the
future
to
research
some
of
the
factors
that
may
have
affected
my
study.
I
would
also
encourage
companies
to
study
these
results
in
hopes
of
implementing
a
stronger
policy
to
help
filter
out
and
detect
fraud.
Undetected
fraud
might
be
the
biggest
secret
in
the
corporate
world,
and
it
would
be
my
hope
that
significant
research
be
published
in
arguing
that
companies
do
suffer
through
stock
price
reactions
as
a
direct
result
of
accounting
fraud.

25. 25
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26. 26
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