The Impact of Internal Control Reports on Information Precision: Evidence from SOX Section 404 Disclosure
Posted: 3 Apr 2009 Last revised: 15 Oct 2010
Date Written: May 20, 2009
This paper explores directly the effect of internal control weakness (hereafter ICW) and their remediation on information precision for firms who filed Section 404 reports with the SEC. Our proxies for information precision are drawn from Barron et al. (1998). First, we find that the presence of ICW is associated with lower precision of public and private information, which in turn increases overall information uncertainty. Second, we find that the adverse effect of ICW on public information precision is stronger for firms with firm-level ICW than for those with account-specific ICW. However, we find no such relation for private information precision. Third, we find that the precision of both private and public information are higher for firms remedying previous weakness relative to firms who do not remedy their weakness. Finally, we find that firms with different internal control opinions in successive years exhibit changes in precision of public and private information consistent with the changes in internal control quality. Our results are robust after controlling for self-selection bias.
Keywords: Internal control weaknesses, Public and private information precision, Firm-level/account-level weaknesses
JEL Classification: J16, M49, M41, M43, G29, G34, G38, D82
Suggested Citation: Suggested Citation