Does Investment Efficiency Improve after the Disclosure of Material Weaknesses in Internal Control over Financial Reporting?
Posted: 3 Mar 2013 Last revised: 11 Mar 2013
Date Written: March 1, 2013
We provide more direct evidence on the causal relation between the quality of financial reporting and investment efficiency. We examine the investment behavior of a sample of firms that disclosed internal control weaknesses under the Sarbanes-Oxley Act. We find that prior to the disclosure, these firms under-invest (over-invest) when they are financially constrained (unconstrained). More importantly, we find that after the disclosure, these firms’ investment efficiency improves significantly.
Keywords: Effectiveness of internal control over financial reporting, Investment efficiency, Disclosure
JEL Classification: M4
Suggested Citation: Suggested Citation