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

Posted: 12 Apr 2007

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

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Abstract

We examine the stock price reaction to management's disclosure of internal control weaknesses under §302 of the Sarbanes Oxley Act and to the characteristics of these weaknesses, controlling for other material announcements in the event window. We find that some characteristics of the weaknesses - their severity, management's conclusion regarding the effectiveness of the controls, their auditability, and how vague the disclosures are - are informative. We also find that the information content of internal control weakness disclosures depends on the severity of the internal control weakness. Moreover, in a sub-sample uncontaminated by other announcements in the event window, we find negative price reactions to the disclosure of internal control weaknesses and to the disclosure of material weaknesses.

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

JEL Classification: G14, G34, M41, M45, M49

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. Review of Accounting Studies, Vol. 13, No. 1, March 2008. Available at SSRN: https://ssrn.com/abstract=979538

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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