CEOs'/CFOs' Swearing by the Numbers: Does It Impact Share Price of the Firm?

Abstract

We examine the impact on share prices of firms whose CEOs and CFOs certify their financial statements under oath, pursuant to the administrative order issued by the SEC on June 27, 2002. We hypothesize that (1) the certification provides assurance to investors by making disclosure more credible and by reducing information asymmetry between owners and management, and (2) the assurance value of certification is reflected in the stock price of the certifying company. Overall, the empirical results are consistent with our hypotheses. We observe, on average, positive abnormal returns for firms whose CEOs/CFOs certified their financial statements by August 14, 2002. Based on an analysis of bid-ask spreads, certifying firms experienced a significant decline in information asymmetry after certification. In cross-sectional analyses, we find abnormal returns are positively associated with firms that were under investigation, that used Andersen as their auditor, and that practiced aggressive revenue recognition.