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Stock Investors’ Response to Disclosures of Material Weaknesses in Internal Control

Author

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  • Mirela DOBRE

    (The Bucharest Academy of Economic Studies, Romania)

Abstract

There has been some controversy regarding the burden that the Sarbanes-Oxley Section 404 (SOX 404) casts on American public companies and whether the benefits outweigh the costs of compliance. Starting with November 15, 2004, Section 404 of the Act requires all accelerated firms (with at least $75 million in public equity) to report on the effectiveness of their internal controls over financial reporting. Reporting under SOX is meant to improve investor confidence concerning the stock of a specific company by adding credibility to its financial statements. An increase in the quality of financial information should determine a reduction in information asymmetry among stock investors, narrowing the bid-ask spread. I use the model developed by Bollen, Smith and Whaley (2004) to separate the cost components of the bid-ask spread for a sample of compliant firms in the period surrounding the implementation of SOX 404. The expectation is that the passage did have a positive effect, by reducing the bid-ask spread.

Suggested Citation

  • Mirela DOBRE, 2011. "Stock Investors’ Response to Disclosures of Material Weaknesses in Internal Control," Journal of Accounting and Management Information Systems, Faculty of Accounting and Management Information Systems, The Bucharest University of Economic Studies, vol. 10(3), pages 397-423, September.
    • Handle: RePEc:ami:journl:v:10:y:2011:i:3:p:397-423
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    Citations

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    Cited by:

    1. Sirimon Treepongkaruna & Tim Brailsford & Stephen Gray, 2014. "Explaining the bid-ask spread in the foreign exchange market: A test of alternate models," Australian Journal of Management, Australian School of Business, vol. 39(4), pages 573-591, November.
    2. Ji, Xu-dong & Lu, Wei & Qu, Wen, 2015. "Determinants and economic consequences of voluntary disclosure of internal control weaknesses in China," Journal of Contemporary Accounting and Economics, Elsevier, vol. 11(1), pages 1-17.

    More about this item

    Keywords

    Bid-ask spread; informed trading; information asymmetry; internal controls; adverse selection cost;
    All these keywords.

    JEL classification:

    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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