Internal Control Weaknesses and Information Uncertainty

Posted: 19 Nov 2007  

Messod Daniel Beneish

Indiana University - Kelley School of Business - Department of Accounting

Mary Brooke Billings

New York University

Leslie D. Hodder

Indiana University - Kelley School of Business - Department of Accounting

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Abstract

We analyze a sample of 330 firms making unaudited disclosures required by Section 302 and 383 firms making audited disclosures required by Section 404 of the Sarbanes - Oxley Act. We find that Section 302 disclosures are associated with negative announcement abnormal returns of -1.8 percent, and that firms experience an abnormal increase in equity cost of capital of 68 basis points. We conclude that Section 302 disclosures are informative and point to lower credibility of disclosing firms' financial reporting. In contrast, we find that Section 404 disclosures have no noticeable impact on stock prices or firms' cost of capital. Further, we find that auditor quality attenuates the negative response to Section 302 disclosures and that accelerated filers - larger firms required to file under Section 404 - have significantly less negative returns (-1.10 percent) than non-accelerated filers (-4.22 percent). The findings have implications for the debate about whether to implement a scaled securities regulation system for smaller public companies: material weakness disclosures are more informative for smaller firms that likely have higher pre-disclosure information uncertainty.

Keywords: Information uncertainty, reporting credibility, Sarbanes-Oxley, scaled securities regulation

JEL Classification: G12, G14, G18, G34, G38, M41, M45, M49

Suggested Citation

Beneish, Messod Daniel and Billings, Mary Brooke and Hodder, Leslie D., Internal Control Weaknesses and Information Uncertainty. Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1031130

Messod Daniel Beneish

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States
812-855-2628 (Phone)
812-855-4985 (Fax)

Mary Brooke Billings

New York University ( email )

44 West 4th Street
New York, NY NY 10012
United States
(212) 998-0097 (Phone)

Leslie D. Davis Hodder (Contact Author)

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

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