Internal Control Weakness and Cost of Equity: Evidence from SOX Section 404 Disclosures

Posted: 17 Sep 2007

See all articles by Maria Ogneva

Maria Ogneva

University of Southern California - Marshall School of Business

K.R. Subramanyam

University of Southern California - Leventhal School of Accounting

Kannan Raghunandan

Florida International University (FIU) - School of Accounting

Abstract

We examine the association between cost of equity and internal control weakness (ICW) for firms that filed first-time Section 404 reports with the SEC. Using several proxies, we find higher implied cost of equity associated with ICW firms than for a control sample of firms that disclosed no ICW. However, the higher cost of equity associated with ICW disappears after controlling for primitive firm characteristics and for analyst forecast bias. Overall, we find that, on average, ICWs are not directly associated with higher cost of equity.

JEL Classification: G12, G34, G38, G29

Suggested Citation

Ogneva, Maria and Subramanyam, K.R. and Raghunandan, Kannan, Internal Control Weakness and Cost of Equity: Evidence from SOX Section 404 Disclosures. Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1014987

Maria Ogneva

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

K.R. Subramanyam (Contact Author)

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States
213-740-5017 (Phone)
213-747-2815 (Fax)

Kannan Raghunandan

Florida International University (FIU) - School of Accounting ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States
305-348-2582 (Phone)

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