Abnormal Returns around Disclosure of Problems in “Internal Control over Financial Reporting”
Journal Title: International Research Journal of Applied and Basic Sciences - Year 2013, Vol 6, Issue 12
Abstract
Our research focuses on the market returns around the disclosure of internal control problems by public firms. We conclude that there are significant negative abnormal returns in the period prior to the disclosure event and that these returns around and subsequent to the disclosure are much smaller. We gathered relevant data of all companies reporting deficiencies / weaknesses in the internal controls (in the SEC-filings) for the period November 2003 up to December 2004. Partitioning this sample by the nature of the disclosure adds further insights into the relation between the disclosures and the abnormal returns. Problems related to staffing issues have no significant effect on stock returns in the post event window, i.e. after the disclosure. Problems related to financial reporting complexity lead to a significant decrease of the average abnormal returns in the post-event window. In addition we also find that the nature of the initiator of internal control problems disclosures affects subsequent abnormal returns. Auditor initiated disclosures show a further decline whereas client initiated disclosures show positive abnormal returns after the filing. All together our findings suggest that the disclosures follow bad news events as reflected in disclosures subsequent to negative abnormal returns and have only marginal information content themselves. The nature of the disclosure is indicative of subsequent returns.
Authors and Affiliations
Nooreddin Razavi zadeh| Department of Accounting, Kangavar, Branch, Islamic Azad University, Kangavar, Iran, email: nrazavi84@yahoo.com
Keywords
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