Industry Contagion Effects of Internal Control Material Weakness Disclosures

Advances in Accounting, Volume 34, September 2016, Pages 27-40

Posted: 2 Aug 2017

See all articles by Brian J. Bolton

Brian J. Bolton

IMD Business School, Global Board Center

Qin Lian

Portland State University

Kathleen Hertz Rupley

Portland State University

Jing Zhao

Portland State University - The School of Business

Date Written: September 1, 2016

Abstract

This study examines whether there is an industry contagion effect for negative market reactions to internal control material weakness (ICMW) disclosures. From a sample of companies experiencing market share price declines to disclosures of ICMW over the years 2005–2014, results indicate that peer industry companies also experience market share price declines. We also find that the decline in share prices is related to accounting quality in that peer industry companies with higher accrual, relative to cash flow, components of earnings have larger negative market reaction compared to companies with lower accrual components of earnings. Our study contributes to the literature streams examining accounting information transfer and internal control quality.

Keywords: SOX Section 404, Internal control material weakness, Industry information transfer, and share price contagion

Suggested Citation

Bolton, Brian J. and Lian, Qin and Rupley, Kathleen Hertz and Zhao, Jing, Industry Contagion Effects of Internal Control Material Weakness Disclosures (September 1, 2016). Advances in Accounting, Volume 34, September 2016, Pages 27-40. Available at SSRN: https://ssrn.com/abstract=3011544

Brian J. Bolton

IMD Business School, Global Board Center ( email )

Ch. de Bellerive 23
P.O. Box 915
CH-1001 Lausanne
Switzerland
+41216180225 (Phone)

Qin Lian (Contact Author)

Portland State University ( email )

United States
5037253728 (Phone)

Kathleen Hertz Rupley

Portland State University ( email )

PO Box 751
Portland, OR 97207
United States
503-725-3133 (Phone)
503-725-5850 (Fax)

Jing Zhao

Portland State University - The School of Business ( email )

631 SW Harrison St.
Portland, OR 97201
United States

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