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

Author

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  • Cheng, Mei
  • Dhaliwal, Dan
  • Zhang, Yuan

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.

Suggested Citation

  • Cheng, Mei & Dhaliwal, Dan & Zhang, Yuan, 2013. "Does investment efficiency improve after the disclosure of material weaknesses in internal control over financial reporting?," Journal of Accounting and Economics, Elsevier, vol. 56(1), pages 1-18.
    • Handle: RePEc:eee:jaecon:v:56:y:2013:i:1:p:1-18
    DOI: 10.1016/j.jacceco.2013.03.001
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    More about this item

    Keywords

    Effectiveness of internal control over financial reporting; Investment efficiency; Disclosure;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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