"People value stocks based on information they receive from a corporation," Haslem said. "The less they believe those numbers, the more it forces the value of the stock down."

FSU News

FSU researcher: Certifying financial reports adds no new value

By Melanie Yeager

As U.S. companies continue to wrestle with the implications of the federal Sarbanes-Oxley Act, a Florida State University researcher has provided evidence that certifying financial statements doesn't sway investors.

"The market had already sorted out which were good or bad," Bruce Haslem, an assistant professor of finance at FSU, said about his research determining whether the law, which requires chief executive officers of publicly traded companies to certify their company's financial statements, adds value.

Haslem's research is summed up in a paper—"Is CEO Certification of Earnings Numbers Value-Relevant?"—that was accepted recently by the Journal of Empirical Finance. Co-authors include Utpal Bhattacharya of Indiana University and Peter Groznik of the University of Ljubljana.

"This particular study has some interesting results that challenge the usefulness and validity of the Sarbanes-Oxley Act," said William Christiansen, chairman of the finance department in FSU's College of Business.

Congress passed the Sarbanes-Oxley Act in 2002 in an effort to stop corporate fraud scandals such as those at Enron and WorldCom. Proponents say the legislation, which penalizes business leaders with jail time for falsifying earnings, is just what the American public needs in order to maintain trust in their investments.

But that doesn't show in the research, Haslem said.

"People value stocks based on information they receive from a corporation," Haslem said. "The less they believe those numbers, the more it forces the value of the stock down." Haslem and his research colleagues found no new evidence of credibility offered by the certification process mandated by Sarbanes-Oxley.

"It imposes cost, but there's not a lot of benefit," Haslem said.

The findings come at a time when the United States is wrestling with how to proceed with Sarbanes-Oxley in place. Haslem said that more U.S. firms are choosing to go public overseas to avoid the higher cost of doing business and burdensome regulations.

The U.S. Securities and Exchange Commission (SEC) voted last month to make it easier to comply with Sarbanes-Oxley by approving management guidelines for evaluating internal controls. This is intended to help businesses tailor assessments to their company's size. The SEC also cut one of two required auditing opinions on corporate internal controls over financial reporting.

Haslem teaches undergraduate and graduate corporate finance courses at FSU. His primary research interest is public policy and its interaction with corporate governance and markets. His work also has been published in The Journal of Finance and The Journal of Law and Economics.

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