The impact of the Sarbanes–Oxley Section 404(b) exemption on earnings informativeness
Bibliographic record
Abstract
We investigate whether firms who voluntarily drop compliance with Section 404(b) of Sarbanes–Oxley (SOX)—the requirement to have an outside auditor conduct an audit of internal control over financial reporting—suffer a loss of earnings informativeness. Section 404(b) has been widely criticized for imposing costs in excess of the benefits to investors. Calls for wholesale repeal and increasingly wide exemptions from compliance continue to this day. The fact that non‐US regulators have not passed similar regulation outside of the USA appears to be partially driven by similar cost concerns. Our results indicate that voluntary dropping of 404(b) is associated with a drop in earnings informativeness. This result is driven primarily by financially distressed companies. Our results address previous calls for research about the market's perception of 404(b) compliance and suggest that regulators may wish to consider firm characteristics when determining which firms should be required to purchase an audit of internal control over financial reporting.
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How this classification was reachedexpand
Full frame machine prediction
Teacher imitationNot calibrated prevalence, not ground truth. Human validation pending. The Gemma side is a direct model label for every work in the frame, read from the title-only record. The Codex side is a classifier learned from the 10,348 direct Codex labels and calibrated to design-weighted sample rates; fields without enough sample support carry no Codex call. Candidate is the union of the two sides; consensus is their intersection. These outputs are machine_predicted_unvalidated and are not human labels.
Distilled classifier scores by category (both heads)
| Category | Codex | Gemma |
|---|---|---|
| Metaresearch | 0.011 | 0.071 |
| Meta-epidemiology (narrow) | 0.000 | 0.000 |
| Meta-epidemiology (broad) | 0.000 | 0.001 |
| Bibliometrics | 0.001 | 0.001 |
| Science and technology studies | 0.001 | 0.002 |
| Scholarly communication | 0.002 | 0.001 |
| Open science | 0.001 | 0.001 |
| Research integrity | 0.001 | 0.002 |
| Insufficient payload (model declined to judge) | 0.004 | 0.001 |
Machine scores (provisional)
The two teacher heads of the student model, read on this work. A score orders the frame for review; it never asserts a category, and the validation status ships verbatim with every row.
Baseline scores from an immature model (maturity gate not passed, 7 training rounds). Scores rank; they never assert a category.
score_only:v0-immature-baseline · verbatim from the scoring run: score_only means the number may rank works, and no category label ships from itClassification
machine, unvalidatedMachine predicted; a candidate call from one source (direct Gemma or distilled Codex), not a consensus.
How this classification was reached, model by model and score by score, is at the end of the page under "How this classification was reached".