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

See all articles by Mei Cheng

Mei Cheng

University of Arizona - Department of Accounting

Dan S. Dhaliwal

University of Arizona - Department of Accounting (deceased)

Yuan Zhang

University of Texas at Dallas

Date Written: March 1, 2013

Abstract

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

Cheng, Mei and Dhaliwal, Dan S. and Zhang, Yuan, Does Investment Efficiency Improve after the Disclosure of Material Weaknesses in Internal Control over Financial Reporting? (March 1, 2013). Journal of Accounting & Economics (JAE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2227081 or http://dx.doi.org/10.2139/ssrn.2227081

Mei Cheng

University of Arizona - Department of Accounting ( email )

Tucson, AZ 85721
United States

Dan S. Dhaliwal

University of Arizona - Department of Accounting (deceased)

Yuan Zhang (Contact Author)

University of Texas at Dallas ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

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