Market Reactions to the Disclosure of Internal Control Weaknesses and to the Characteristics of Those Weaknesses Under Section 302 of the Sarbanes Oxley Act of 2002

42 Pages Posted: 2 Nov 2005

See all articles by Jacqueline S. Hammersley

Jacqueline S. Hammersley

University of Georgia - J.M. Tull School of Accounting

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management

Catherine Shakespeare

University of Michigan - Stephen M. Ross School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: January 2007

Abstract

Under Section 302 of the Sarbanes Oxley Act, officers must evaluate the effectiveness of internal controls quarterly. We examine the stock price reaction to management's disclosure of internal control weaknesses and to their characteristics, controlling for other material announcements are made during the event window. We find evidence suggesting that some characteristics of the internal control weaknesses - their severity, management's conclusion regarding the effectiveness of the controls, their auditability, and how vague the disclosures are - are informative. In subsequent analyses, we find that the relation between returns and auditability holds for significant deficiencies and control deficiencies as well as for material weaknesses. However, the relation between returns and how vague the disclosure is is driven by the observations with material weaknesses. This suggests that the information content of internal control weakness disclosures depends on the severity of the internal control weakness.

Keywords: Internal control weakness, material weakness, market reactions, event study, Sarbanes Oxley Act of 2002

JEL Classification: G14, M41, M42

Suggested Citation

Hammersley, Jacqueline S. and Myers, Linda A. and Shakespeare, Catherine, Market Reactions to the Disclosure of Internal Control Weaknesses and to the Characteristics of Those Weaknesses Under Section 302 of the Sarbanes Oxley Act of 2002 (January 2007). Available at SSRN: https://ssrn.com/abstract=951085 or http://dx.doi.org/10.2139/ssrn.951085

Jacqueline S. Hammersley

University of Georgia - J.M. Tull School of Accounting ( email )

Athens, GA 30602
United States

Linda A. Myers (Contact Author)

University of Tennessee, Haslam College of Business, Accounting and Information Management ( email )

Knoxville, TN
United States

Catherine Shakespeare

University of Michigan - Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

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