Investor reactions to restatements conditional on disclosure of internal control weaknesses
Purpose: The purpose of this paper is to investigate investor reactions to financial restatements conditional on disclosures of internal control weaknesses under Section 404 of the Sarbanes-Oxley Act. Design/methodology/approach: The research uses cumulative abnormal stock returns (CARs) as a proxy...
| Main Authors: | , , |
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| Other Authors: | |
| Format: | Journal Article |
| Language: | English |
| Published: |
2020
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| Subjects: | |
| Online Access: | https://hdl.handle.net/10356/140333 |
| _version_ | 1826117390335737856 |
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| author | Li, Yiwen Park, You-il Wynn, Jinyoung |
| author2 | Nanyang Business School |
| author_facet | Nanyang Business School Li, Yiwen Park, You-il Wynn, Jinyoung |
| author_sort | Li, Yiwen |
| collection | NTU |
| description | Purpose: The purpose of this paper is to investigate investor reactions to financial restatements conditional on disclosures of internal control weaknesses under Section 404 of the Sarbanes-Oxley Act. Design/methodology/approach: The research uses cumulative abnormal stock returns (CARs) as a proxy for investor reactions. Restatements and internal control reports are available on audit analytics. Multivariate regression analyses were used for testing. Findings: Using a sample of restating firms whose original misstatements are linked to underlying internal control weaknesses, the research finds that cumulative abnormal returns for firms disclosing internal control weaknesses in a timely manner is negative in a three-day window around the restatement announcements. The finding indicates that restatements with early disclosure of internal control weaknesses provide more persuasive evidence of the ineffectiveness of a firm’s internal control over financial reporting, rather than early disclosure lowering the information asymmetry between a firm and investors. Research limitations/implications: This study employs CARs to examine the market reaction to restatements conditional on disclosure of internal control weaknesses. Practical implications: Further study on reactions by creditors who have access to private information on firms could extend the implications of the finding. Originality/value: The study contributes to the existing research by documenting that early disclosure of material weaknesses in internal control affects investors’ reactions to financial restatements. |
| first_indexed | 2024-10-01T04:26:30Z |
| format | Journal Article |
| id | ntu-10356/140333 |
| institution | Nanyang Technological University |
| language | English |
| last_indexed | 2024-10-01T04:26:30Z |
| publishDate | 2020 |
| record_format | dspace |
| spelling | ntu-10356/1403332023-05-19T07:31:18Z Investor reactions to restatements conditional on disclosure of internal control weaknesses Li, Yiwen Park, You-il Wynn, Jinyoung Nanyang Business School Business::Accounting Disclosures Financial Restatements Purpose: The purpose of this paper is to investigate investor reactions to financial restatements conditional on disclosures of internal control weaknesses under Section 404 of the Sarbanes-Oxley Act. Design/methodology/approach: The research uses cumulative abnormal stock returns (CARs) as a proxy for investor reactions. Restatements and internal control reports are available on audit analytics. Multivariate regression analyses were used for testing. Findings: Using a sample of restating firms whose original misstatements are linked to underlying internal control weaknesses, the research finds that cumulative abnormal returns for firms disclosing internal control weaknesses in a timely manner is negative in a three-day window around the restatement announcements. The finding indicates that restatements with early disclosure of internal control weaknesses provide more persuasive evidence of the ineffectiveness of a firm’s internal control over financial reporting, rather than early disclosure lowering the information asymmetry between a firm and investors. Research limitations/implications: This study employs CARs to examine the market reaction to restatements conditional on disclosure of internal control weaknesses. Practical implications: Further study on reactions by creditors who have access to private information on firms could extend the implications of the finding. Originality/value: The study contributes to the existing research by documenting that early disclosure of material weaknesses in internal control affects investors’ reactions to financial restatements. 2020-05-28T03:50:35Z 2020-05-28T03:50:35Z 2018 Journal Article Li, Y., Park, Y., & Wynn, J. (2018). Investor reactions to restatements conditional on disclosure of internal control weaknesses. Journal of Applied Accounting Research, 19(3), 423-439. doi:10.1108/jaar-10-2017-0107 0967-5426 https://hdl.handle.net/10356/140333 10.1108/JAAR-10-2017-0107 2-s2.0-85051719564 3 19 423 439 en Journal of Applied Accounting Research © 2018 Emerald Publishing Limited. All rights reserved. |
| spellingShingle | Business::Accounting Disclosures Financial Restatements Li, Yiwen Park, You-il Wynn, Jinyoung Investor reactions to restatements conditional on disclosure of internal control weaknesses |
| title | Investor reactions to restatements conditional on disclosure of internal control weaknesses |
| title_full | Investor reactions to restatements conditional on disclosure of internal control weaknesses |
| title_fullStr | Investor reactions to restatements conditional on disclosure of internal control weaknesses |
| title_full_unstemmed | Investor reactions to restatements conditional on disclosure of internal control weaknesses |
| title_short | Investor reactions to restatements conditional on disclosure of internal control weaknesses |
| title_sort | investor reactions to restatements conditional on disclosure of internal control weaknesses |
| topic | Business::Accounting Disclosures Financial Restatements |
| url | https://hdl.handle.net/10356/140333 |
| work_keys_str_mv | AT liyiwen investorreactionstorestatementsconditionalondisclosureofinternalcontrolweaknesses AT parkyouil investorreactionstorestatementsconditionalondisclosureofinternalcontrolweaknesses AT wynnjinyoung investorreactionstorestatementsconditionalondisclosureofinternalcontrolweaknesses |