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

Author

Listed:
  • 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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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Waters, James, 2013. "The Sarbanes-Oxley Act, industrial innovation, and real option creation," MPRA Paper 49173, University Library of Munich, Germany.
    2. repec:eee:reacre:v:27:y:2015:i:2:p:138-159 is not listed on IDEAS
    3. Shen, Chung-Hua & Luo, Fuyan & Huang, Dengshi, 2015. "Analysis of earnings management influence on the investment efficiency of listed Chinese companies," Journal of Empirical Finance, Elsevier, vol. 34(C), pages 60-78.
    4. Chen, Ruiyuan & El Ghoul, Sadok & Guedhami, Omrane & Wang, He, 2017. "Do state and foreign ownership affect investment efficiency? Evidence from privatizations," Journal of Corporate Finance, Elsevier, vol. 42(C), pages 408-421.
    5. Huang, Pinghsun & Guo, Jun & Ma, Tongshu & Zhang, Yan, 2015. "Does the value of cash holdings deteriorate or improve with material weaknesses in internal control over financial reporting?," Journal of Banking & Finance, Elsevier, vol. 54(C), pages 30-45.
    6. repec:spr:reaccs:v:23:y:2018:i:1:d:10.1007_s11142-017-9427-x is not listed on IDEAS
    7. Chen, Tao & Xie, Lingmin & Zhang, Yuanyuan, 2017. "How does analysts' forecast quality relate to corporate investment efficiency?," Journal of Corporate Finance, Elsevier, vol. 43(C), pages 217-240.
    8. repec:eee:jbrese:v:86:y:2018:i:c:p:53-67 is not listed on IDEAS
    9. repec:spr:reaccs:v:22:y:2017:i:2:d:10.1007_s11142-017-9393-3 is not listed on IDEAS
    10. Shelagh Campbell & Yingqi Li & Junli Yu & Zhou Zhang, 2016. "The Impact of Occupational Community on the Quality of Internal Control," Journal of Business Ethics, Springer, vol. 139(2), pages 271-285, December.
    11. Dongyoung Lee, 2017. "Corporate Social Responsibility and Management Forecast Accuracy," Journal of Business Ethics, Springer, vol. 140(2), pages 353-367, January.
    12. repec:eee:jaecon:v:63:y:2017:i:2:p:358-384 is not listed on IDEAS
    13. Ranjan D’Mello & Xinghua Gao & Yonghong Jia, 2017. "Internal control and internal capital allocation: evidence from internal capital markets of multi-segment firms," Review of Accounting Studies, Springer, vol. 22(1), pages 251-287, March.
    14. repec:eee:advacc:v:33:y:2016:i:c:p:11-19 is not listed on IDEAS
    15. García Lara, Juan Manuel & García Osma, Beatriz & Penalva, Fernando, 2016. "Accounting conservatism and firm investment efficiency," Journal of Accounting and Economics, Elsevier, vol. 61(1), pages 221-238.
    16. DeFond, Mark & Zhang, Jieying, 2014. "A review of archival auditing research," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 275-326.
    17. repec:eee:jaecon:v:64:y:2017:i:1:p:123-149 is not listed on IDEAS

    More about this item

    Keywords

    Effectiveness of internal control over financial reporting; Investment efficiency; Disclosure;

    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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