Market Reactions to Wells Notice: An Empirical Analysis

Financial reporting scandals earlier in the decade and the recent financial crises have led to various market participants calling for regulatory refinement and stronger enforcement. This paper empirically examines the capital market effects of the disclosure that the SEC had issued Wells Notice to a firm. Statistically significant price reaction of −3.3% is found in a short window around the Wells Notice disclosure. The price reaction is significantly more negative for firms that used higher accruals at the time of alleged violation. The price reaction is more negative when the CEO is also issued a Wells Notice, but is less negative if the settlement is announced with the Wells Notice. Despite the materiality of Wells Notice, we estimate that only one out of every three firms that received Wells Notice discloses this fact to public. These findings contribute to the policy debate regarding disclosure requirements on Wells Notice.