Do Section 404 Disclosures Affect Investors' Perceptions of Information Systems Reliability and Stock Price Predictions?

International Journal of Accounting Information Systems, Forthcoming

Posted: 10 Nov 2011

See all articles by Vicky Arnold

Vicky Arnold

University of Central Florida - College of Business Administration; University of Melbourne - Department of Accounting and Business Information Systems

Jean C. Bedard

Bentley University - Department of Accountancy

Jillian R. Alderman

Pepperdine University - Graziadio School of Business and Management

Steve G. Sutton

University of Central Florida - College of Business Administration

Date Written: November 4, 2011

Abstract

This paper examines the impact of Sarbanes-Oxley Act (2002) Section 404 disclosures regarding internal controls over financial reporting on investors’ information systems (IS) reliability assessments and stock price predictions. Prior research shows that Section 404 disclosures signal differences in the quality of company financial information. However, research on how Section 404 disclosures impact financial markets shows mixed results. In order for Section 404 information to affect stock prices, users must access that information, assess its implications, and incorporate those implications into their decision processes. We investigate the stages of this process through an experiment using a 10-K filing adapted from an actual company, utilizing process-tracing software to record information access. Two versions of the case were used to manipulate the type of Section 404 opinion, noting effective or ineffective control systems. Results show that professional investors are more likely to access Section 404 information than nonprofessionals. Also, our findings imply that professional investors have a lower baseline expectation of reliability that increases on learning of effective controls, while nonprofessionals have a higher baseline expectation of reliability that declines on learning of ineffective controls. While IS reliability is positively associated with nonprofessionals’ stock price predictions, there is no such association for professionals. These findings help explain the mixed results in past archival studies. Prior results on market response to Section 404 information may be due in part to failure to access Section 404 reports, and to the low weighting placed on IS reliability by financial professionals.

Keywords: Investor judgment, internal control, general system controls, Sarbanes-Oxley Section 404, information systems reliability, risk propensity

JEL Classification: M40, M41

Suggested Citation

Arnold, Vicky and Bedard, Jean C. and Alderman, Jillian R. and Sutton, Steve G., Do Section 404 Disclosures Affect Investors' Perceptions of Information Systems Reliability and Stock Price Predictions? (November 4, 2011). International Journal of Accounting Information Systems, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1957386

Vicky Arnold

University of Central Florida - College of Business Administration ( email )

PO Box 161400
Orlando, FL 32816
United States

University of Melbourne - Department of Accounting and Business Information Systems ( email )

Victoria
Melbourne, Victoria 3010 3010
Australia

Jean C. Bedard

Bentley University - Department of Accountancy ( email )

175 Forest Street
Waltham, MA 02452
United States
781-891-2410 (Phone)
781-891-2896 (Fax)

Jillian R. Alderman

Pepperdine University - Graziadio School of Business and Management ( email )

Malibu, CA
United States

Steve G. Sutton (Contact Author)

University of Central Florida - College of Business Administration ( email )

PO Box 161400
Orlando, FL 32816
United States

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