Internal control weaknesses and information uncertainty.pdf

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1、InternalControlWeaknessesandInformationUncertaintyM.D.Beneish,M.Billings,L.HodderKelleySchoolofBusinessIndianaUniversitystMarch1,2005CorrespondingAuthor:LeslieHodderTel:(812)855-9951e-mail:lhodder@indiana.eduInternalControlWeaknessesandInformationUncertaintyAbstractUsingasampl

2、eof336firmsmakingreportsrequiredbytheSarbanes-OxleyAct,weexaminetheeffectofmandatedinternalcontrolweaknessesdisclosuresoninformationuncertaintyfordisclosingfirmsandforsize-andperformance-matchednon-disclosingfirms.Wefindasignificantlynegative(weaklypositive)priceresponsefordis

3、closing(non-disclosing)firmsconsistentwithresolutionofinformationuncertaintyinbothgroups.Fordisclosingfirmswefindthatthenegativemarketresponsetodisclosureisexacerbatedbyconditionsassociatedwithhigherinherentreportingrisk,includingauditorturnoverandhigh-riskindustrymembership.H

4、owever,wefindthatthenegativemarketresponsetodisclosureismitigatedwhenthefirmhasengagedahighqualityauditor.Inaddition,wefindthatthenegativemarketreactionfordisclosingfirmsisdampenedwhenthefirm’spreviouslyreportedearningshaveanabnormallyhighaccrualscomponent.Thisresultisconsiste

5、ntwiththedisclosurehavinglowerinformationcontentwhenpoorearningsqualityhasalreadybeenconveyedbyhighabnormalaccruals.JELClassification:G14,G18,G30Keywords:earningsquality;informationuncertainty;reportingcredibility;Sarbanes-Oxley;regulation1.IntroductionRecentaccountingscandals

6、haveledtoincreasedinterestintothedeterminantsandconsequencesoflowfinancialreportingquality.AseriesofcongressionalinquiriesintotheintegrityoffinancialreportingsystemsintheUnitedStatesculminatedwiththepassageoftheSarbanes-OxleyAct(SOX)in2002.Amongotherprovisions,SOXrequiresfirms

7、toidentifyanddisclosematerialweaknessesininternalcontrolsoverfinancialreporting.Onepotentialeffectofthesedisclosuresisareductionoftheaveragelevelofinformationuncertaintyinthemarket.EasleyandO’Hara(2004)showsthatinformationuncertaintymaybeanon-diversifiableriskfactorpricedbyinv

8、estors.Therefore,regulationthatreducessystematicinformationri