Analyzing Late SEC Filings for Differential Impacts of IS and Accounting Issues

1. Analyzing Late SEC Filings for Differential Impacts of IS and Accounting Issues Jian Cao Florida Atlantic University Thomas Calderon The University of Akron Akhilesh Chandra The University of Akron Li Wang The University of Akron UWCISA October 2, 2009

2. Total Number of Delayed 10-K and 10-Q Filings for CRSP companies • Timely disclosures and the SEC’s accelerated filing deadlines for Forms 10-K and 10-Q (SEC 2002, 2005) UWCISA October 2, 2009

3. How Does IS affect Financial Reporting? • Automated and integrated IS environment can have pervasive effects on financial reporting. • Timeliness • Internal control and audit quality • IS related internal control weakness - audit delays and less accurate forecasts UWCISA October 2, 2009

4. Motivation • When a company says that IS is a source of tardiness, it sends a significantly negative signal to the market. • IS issues are generally not disclosed to the market • IS related filing delays can be an indicator of broader financial reporting issues • We investigates stock market response to the reasons for notification of late SEC filings (i.e., NT 10-Ks and NT 10-Qs) • Does the market react differently to IS issues versus accounting and other issues? UWCISA October 2, 2009

5. Background • In 2002, in response to SOX Section 409, the SEC accelerated the filing deadlines for 10-Ks and 10-Qs. • Form 10-K: 90 days (12/02) - 75 days (12/03) - 60 days (12/04) • Form 10-Q: 45 days (12/03) - 40 days (12/04) - 35 days (12/05) • In 2005, the SEC revised rules - increasing late filing & SOX 404. Large AcceleratedAcceleratedNon-Accelerated • Form 10-K 60 days (12/06) 75 days 90 days • Form 10-Q 40 days 40 days 45 days UWCISA October 2, 2009

6. Background • Form 12b-25 or NT filing with the SEC • Notice of late filing before the due date • Must detail the reasons • Negative consequences • SEC sanction • Exchange delisting • Therefore, we expect negative stock market response. UWCISA October 2, 2009

7. Literature Review • Delayed 10-K filings could be a signal for financial distress • Lawrence (1983): 1975-1981, 58 firms • Alford, Jones and Zmijewski (1994): 1978-1985, 182 firms • The impact of NT filings on subsequent releases of delayed10-Ks and 10-Qs • Griffin (2003) finds that the investor response to 10-K and 10-Q reports is more elevated for prior late filers UWCISA October 2, 2009

8. Hypothesis • IS issues affect the effectiveness of internal control, the timeliness, and the reliability of financial statements • Prior to the implementation of SOX 404 (accelerated filers - 2004), disclosure about IS issues is not widely available • We expect IS reasons for NT filings to be associated with negative market response and to have larger negative response than accounting and other related reasons. UWCISA October 2, 2009

9. Sample • Our initial sample is composed of all NT filings for 10-K and 10-Q that are included in the Audit Analytics Database January 2000 to December 2006. • We select filings only for those companies that are also listed in CRSP. This procedure yields 1,310 annual and 1,727 quarterly filings, representing 1,303 individual registrant companies. UWCISA October 2, 2009

10. Methodology • Market response: standardized daily excess stock return (SER) SERi,t = ERi,t / ERi,t ERi,t- Market-adjusted return on t; ERi,t – Std. Dev. of ERi,tcalculated over a “non information” estimation period ([-10, -6] to [+6, +10]) • Reasons for filing late - 10 primary categories: UWCISA October 2, 2009

11. Methodology (cont’d) • Regression model for NT 10-Ks SERi,t = α0 + α1YR0304i,t + α2YR05i,t + α3WKi,t + α4ICi,t + α5MCi,t + α6COi,t + α7LIQ + α8LEV + α9SECi,t + α10SOXi,t + α11AQi,t + α12FINi,t + α13AUDi,t + α14ADMi,t + α15GCi,t + α16ISi,t + ei,t(1) • Regression model for NT 10-Qs SERi,t = β0 + β1Q04i,t + β2Q05i,t + β3WKi,t + β4ICi,t + β5MCi,t + β6COi,t + α7LIQ + α8LEV + β9SECi,t + β10SOXi,t + β11AQi,t + β12FINi,t + β13AUDi,t + β14ADMi,t + β15GCi,t + β16ISi,t + ei,t(2) (-) (-) UWCISA October 2, 2009

12. Results • Tables 4, 5, and 6 UWCISA October 2, 2009

13. Conclusions • The overall significant negative returns on the day of and one day following the NT filings - Investors do value the timeliness of the financial report and there is economic cost associated with late filing. • More importantly, IS issues - significantly negative market response compared with accounting and other reasons for NT filings. • The findings suggest the reasons for NT filings provide information to the market and that late filers bear different noncompliance costs for IS issues than for accounting and other issues. UWCISA October 2, 2009

14. Contribution • Contributes to the wider research questions regarding the impact of IS on the quality of financial reporting. • Documents, using a broad sample, that late filers bear different noncompliance costs for IS issues than for accounting and other issues. • Improves our understanding of the information content of untimely filings (e.g., Lawrence 1983; Alford, Jones and Zmijewski 1994) UWCISA October 2, 2009

15. Thank You! UWCISA October 2, 2009