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SOX-Mandated Internal Control Deficiency Disclosure under Section 302 and Earnings Quality: Evidence from Cross-Listed Firms

63 Pages Posted: 14 Nov 2007 Last revised: 16 Mar 2009

Guojin Gong

Penn State University - Smeal College of Business

Bin Ke

National University of Singapore

Yong Yu

University of Texas at Austin

Date Written: March 3, 2009

Abstract

We examine the usefulness of SOX-mandated internal control deficiency (ICD) disclosure under Section 302 in assessing earnings quality for cross-listed firms relative to U.S. firms. Consistent with prior research, we find that U.S. firms' Section 302 ICD disclosure conveys useful information about earnings quality. However, cross-listed firms' Section 302 ICD disclosure is on average unrelated to earnings quality and significantly less informative about earnings quality than U.S. firms'. We provide evidence that the reduced usefulness of cross-listed firms' ICD disclosure is due to management's weaker incentive to detect and report existing ICDs. Specifically, the weaker association between the ICD disclosure and earnings quality for cross-listed firms relative to U.S. firms is primarily driven by cross-listed firms domiciled in weak investor protection countries. In addition, cross-listed firms' propensity to disclose ICDs declines with the degree of management's private control benefits and this effect is stronger for firms domiciled in weak investor protection countries.

Keywords: Cross listing, Internal control, Sarbanes-Oxley, Disclosure

JEL Classification: G34, G38, K22, M41, M45, M47

Suggested Citation

Gong, Guojin and Ke, Bin and Yu, Yong, SOX-Mandated Internal Control Deficiency Disclosure under Section 302 and Earnings Quality: Evidence from Cross-Listed Firms (March 3, 2009). Available at SSRN: https://ssrn.com/abstract=1028620 or http://dx.doi.org/10.2139/ssrn.1028620

Guojin Gong

Penn State University - Smeal College of Business ( email )

University Park, PA 16802
United States
814-863-7055 (Phone)

Bin Ke (Contact Author)

National University of Singapore ( email )

Mochtar Riady Building, BIZ 1, #07-54
15 Kent Ridge Drive
Singapore, 119245
Singapore
+6566013133 (Phone)

Yong Yu

University of Texas at Austin ( email )

1 University Station B6400
Austin, TX 78712
United States
(512)471-6714 (Phone)
(512)471-3904 (Fax)

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