Internal Control Weakness, Investment and Firm Valuation

19 Pages Posted: 9 Mar 2019

See all articles by Gady Jacoby

Gady Jacoby

College of Management Academic Studies; University of Manitoba - Department of Accounting and Finance; Seton Hall University

Yingqi Li

Shanghai Lixin University of Commerce

Tianze Li

University of Manitoba - Department of Accounting and Finance

Steven Xiaofan Zheng

University of Manitoba - Asper School of Business

Date Written: October 31, 2017

Abstract

We propose reduced investment as a potential explanation for why firms with internal control weakness (ICW) exhibit lower valuation relative to non-ICW firms. We show that ICW firms significantly reduce investment around ICW disclosure and also have poor stock performance. Additional evidence shows that many of the investment reductions have been announced during the year before ICW disclosure. A possible explanation for investment reductions is the higher costs of financial friction associated with ICW. Consistent with this explanation, we show that ICW firms with credit ratings do not reduce their investment as much and have much better stock performance than ICW firms without credit ratings.

Keywords: Sarbanes-Oxley Act, Internal Control Weakness, Stock Performance, q theory of investments, Benchmark Adjusted Returns, Credit Ratings

JEL Classification: G12, G14, G30

Suggested Citation

Jacoby, Gady and Jacoby, Gady and Li, Yingqi and Li, Tianze and Zheng, Steven Xiaofan, Internal Control Weakness, Investment and Firm Valuation (October 31, 2017). Finance Research Letters, Vol. 25, 2018, Available at SSRN: https://ssrn.com/abstract=3337065

Gady Jacoby (Contact Author)

College of Management Academic Studies ( email )

Elie Wiesel St 2
Rishon LeTsiyon
Israel

University of Manitoba - Department of Accounting and Finance

Faculty of Management
Winnipeg, MB R3T 5V4
Canada

Seton Hall University ( email )

400 S Orange Avenue
South Orange, NJ 07079
United States

Yingqi Li

Shanghai Lixin University of Commerce ( email )

2800 Wenxiang Road
Shanghai
China

Tianze Li

University of Manitoba - Department of Accounting and Finance ( email )

Faculty of Management
Winnipeg, MB R3T 5V4
Canada

Steven Xiaofan Zheng

University of Manitoba - Asper School of Business ( email )

Department of Accounting and Finance
Winnipeg, Manitoba R3T 5V4
Canada
204-474-7933 (Phone)

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