Economic Determinants and Consequences of Voluntary Disclosure of Internal Control Effectiveness: Evidence from Initial Public Offerings

46 Pages Posted: 16 Jan 2012

See all articles by Sudipta Basu

Sudipta Basu

Temple University - Department of Accounting

Jagan Krishnan

Temple University - Department of Accounting

Jong Eun Lee

Sungkyunkwan University

Yinqi Zhang

American University

Date Written: January 2012

Abstract

This study investigates the incentives and market reactions to IPO firms’ preemptive disclosure of internal control weaknesses in their prospectuses, in spite of exemptions from the requirements of Sections 302 and 402 of the Sarbanes-Oxley Act before going public. We find IPO firms with greater litigation risk are more likely to disclose internal control weaknesses after controlling for the probability of having internal control weaknesses. Voluntary disclosures of internal control problems and the related remediation procedures are associated with less IPO underpricing, consistent with the proposition (e.g., Rock 1986; Beatty and Ritter 1986) that more IPO-related disclosures may reduce the information asymmetry between informed and uninformed investors.

Keywords: Material Weaknesses, SOX 302, SOX 404, IPO Underpricing

JEL Classification: G24, K22, M13, M41, M42, M48

Suggested Citation

Basu, Sudipta and Krishnan, Jagan and Lee, Jong Eun and Zhang, Yinqi, Economic Determinants and Consequences of Voluntary Disclosure of Internal Control Effectiveness: Evidence from Initial Public Offerings (January 2012). CAAA Annual Conference 2012. Available at SSRN: https://ssrn.com/abstract=1983233 or http://dx.doi.org/10.2139/ssrn.1983233

Sudipta Basu

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States
215.204.0489 (Phone)
215.204.5587 (Fax)

Jagan Krishnan (Contact Author)

Temple University - Department of Accounting ( email )

Fox School of Business & Management
1801 Liacorous Walk
Philadelphia, PA 19122
United States
215-204-8126 (Phone)
215-204-5587 (Fax)

Jong Eun Lee

Sungkyunkwan University ( email )

25-2 Sungkyunkwan-ro
Jongno-gu
Seoul, 110-745
Korea, Republic of (South Korea)
82-2-760-0441 (Phone)
82-2760-0440 (Fax)

Yinqi Zhang

American University ( email )

4400 Massachusetts Ave NW
Washington, DC 20016
United States

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