Impact of the Announcement of Material Weaknesses on Internal Controls on Share Prices of Latin America Companies: Evidence from SOX 404 Section

Abstract:     
This paper investigates the impact of announcements of material weaknesses on internal controls on share prices of Latin America companies listed with ADRs levels II and III. An event study methodology was applied based on the Filing Date of Annual Report 20-F submitted to Securities and Exchange Commission in 2007. Our hypothesis is that the announcement of material weaknesses on internal controls by some firms would evidence a situation of increased risk perception by investors, which would lead to reduce these firms' market value. Therefore, we expect that such announcements should cause a negative impact on share prices. As our main result, contrary to our hypothesis, we find evidence that the announcement of material weaknesses on internal controls didn't cause a negative impact on share prices during the event windows. This result doesn't support the idea that companies with certificated efficient internal controls (without material weaknesses detected), are perceived in a different way by the market. Under a broader perspective, our results corroborate the results of previous researches that show that the implementation costs of Section 404 are not compensated by benefits translated into a higher corporate value.

Note: Downloadable document is in Portuguese.

Number of Pages in PDF File: 42

Keywords: Internal Controls, Sarbanes-Oxley Act, Material Weaknesses, Annual Report 20-F, event study

JEL Classification: G32, G34

working papers series