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 |
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| Authors: | Jacqueline S Hammersley Linda A Myers Catherine Shakespeare |
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| Institution: | (1) J.M. Tull School of Accounting, University of Georgia, Athens, GA 30602, USA;(2) Mays Business School, Texas A&M University, 4353 TAMU, College Station, TX 77843-4353, USA;(3) Stephen M. Ross School of Business, University of Michigan, Ann Arbor, MI 48109, USA |
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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 the vagueness of the disclosures—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 material weaknesses.
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| Keywords: | Internal control weakness Material weakness Market reactions Event study Sarbanes Oxley Act of 2002 |
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