Disclosure under heightened legal accountability: evidence from the Sarbanes–Oxley act

Abstract This paper examines managerial disclosure behavior in mandatory filings in response to heightened legal accountability. We treat the enactment of the Sarbanes–Oxley Act (SOX) in 2002 as a regulatory event that increases the legal accountability of top executives and analyze the filing tones of a large sample of Forms 10-Q and 10-K from 1994 to 2017 using textual analysis. We find that changes in filing tones carry substantial information that is promptly reflected in the capital market. Furthermore, we identify a structural break in the distribution of filing tones around the passage of SOX. Firms tend to adopt a more negative tone in their quarterly mandatory disclosures following the enactment of SOX. Interestingly, investors exhibit a stronger reaction to changes in filing tone in the post-SOX era, which is not solely driven by the systematic shift in tone distribution. Additionally, we document that while filing tones are generally associated with common performance measures, this relationship weakens after SOX. These findings contribute to the understanding of how legal reforms shape managerial communication strategies and how market participants interpret soft information under regulatory scrutiny. By shedding light on disclosure behavior in response to increased legal accountability, this study offers timely implications for future legislative reforms, investor interpretation of corporate filings, and the broader governance of financial reporting.