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Does the value of cash holdings deteriorate or improve with material weaknesses in internal control over financial reporting?

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  • Huang, Pinghsun
  • Guo, Jun
  • Ma, Tongshu
  • Zhang, Yan

Abstract

We find that cash holdings are more valuable for firms disclosing material weaknesses in the Sarbanes–Oxley (SOX) 404 internal control assessments. We estimate that the value spread for firms with weak controls vs. effective controls is about $0.25 for an extra dollar of cash. Our results are not driven by account-level weaknesses but by more severe, company-level weaknesses in internal control over financial reporting (ICFR). Further, the economic consequences of cash resources significantly decrease with the remediation of previously reported material weaknesses. These results suggest that the favorable (precautionary) impact induced by weak ICFR appears to more than offset the adverse (agency) effect entailed by ineffective ICFR. Overall, our results survive alternative variable specifications, sample splits, matched sample analyses, and a variety of controls.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:jbfina:v:54:y:2015:i:c:p:30-45 DOI: 10.1016/j.jbankfin.2015.01.007
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    More about this item

    Keywords

    Corporate cash holdings; Internal control weaknesses; SOX 404;

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting

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