Industry Contagion Effects of Internal Control Material Weakness Disclosures
Advances in Accounting, Volume 34, September 2016, Pages 27-40
Posted: 2 Aug 2017
Date Written: September 1, 2016
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
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