Correspondence: Robert, Houmes, Accounting & Finance Department, University of North Florida, Building 42, Room 3001, 1 UNF Drive, Jacksonville, FL 32224, USA. Tel: +1 904 620 1146; E-mail: bob.houmes@unf.edu

¹is a visiting accounting professor at the University of North Florida in Jacksonville, Florida.

²is an assistant professor at East Carolina University. She received her PhD in 2006 from Florida Atlantic University and her BS in Accounting and Finance from Florida State University in 1983. Prior to returning to school in 2002, Denise was the Partner-in-charge of Arthur Andersen's South Florida Audit Division. Denise is a member of the audit committee of two publicly traded corporations. Her published work and research agenda include topics in auditor independence, public disclosures, and audit committee effectiveness.

Received 25 January 2008; Revised 25 January 2008; Published online 21 February 2008.

EXECUTIVE SUMMARY

Many have criticised the high cost of implementing the provisions of the Sarbanes–Oxley Act of 2002 (SOX — eg complying with Section 404, implementing enhanced corporate governance measures). In this paper, we investigate a potential benefit of SOX, an increase in the frequency of successful motions to dismiss in securities fraud class action lawsuits. A securities class action lawsuit is a significant event for a publicly traded company. The potential for damages and the adverse publicity from securities litigation is significant and the utilisation of scarce resources to defend, as well as the ensuing settlement amounts, can be substantial. A court's decision to grant or deny a request for dismissal either absolves the defendant from future legal liability, or virtually assures that settlements will be made or damages will be paid. If the corporate governance, oversight, and disclosure enhancing provisions of SOX are successful, we would expect the likelihood of successful motions to dismiss would increase. Based on our empirical analyses, it appears as though the frequency of defendants' successful motions to dismiss securities class action lawsuits has increased, suggesting that although the cost of complying with SOX may be great, at least one of its benefits may exceed its costs.