Does investment efficiency improve after the disclosure of material weaknesses in internal control over financial reporting?

Research output: Contribution to journalArticle

112 Citations (Scopus)

Abstract

We provide more direct evidence on the causal relation between the quality of financial reporting and investment efficiency. We examine the investment behavior of a sample of firms that disclosed internal control weaknesses under the Sarbanes-Oxley Act. We find that prior to the disclosure, these firms under-invest (over-invest) when they are financially constrained (unconstrained). More importantly, we find that after the disclosure, these firms' investment efficiency improves significantly.

Original languageEnglish (US)
Pages (from-to)1-18
Number of pages18
JournalJournal of Accounting and Economics
Volume56
Issue number1
DOIs
StatePublished - Jul 2013

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Material weakness
Financial reporting
Investment efficiency
Disclosure
Internal control
Firm investment
Investment behavior
Internal control weaknesses
Sarbanes-Oxley

Keywords

  • Disclosure
  • Effectiveness of internal control over financial reporting
  • Investment efficiency

ASJC Scopus subject areas

  • Accounting
  • Economics and Econometrics
  • Finance

Cite this

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abstract = "We provide more direct evidence on the causal relation between the quality of financial reporting and investment efficiency. We examine the investment behavior of a sample of firms that disclosed internal control weaknesses under the Sarbanes-Oxley Act. We find that prior to the disclosure, these firms under-invest (over-invest) when they are financially constrained (unconstrained). More importantly, we find that after the disclosure, these firms' investment efficiency improves significantly.",
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