An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Chan Li
University of Kansas

Susan Scholz
University Of Kansas

Qian Wang
University of Kansas

Abstract: This study examines the market reactions to the two types of disclosures that may indicate unreliable financial statements: internal control material weaknesses and restatements, and how their interrelationship affects investors’ beliefs of companies’ financial reports. We find that the market does not react negatively to an ICMW disclosure, regardless of whether this disclosure has been expected by a prior restatement announcement. However, the market reacts differently to the restatement announcements based on the prior information of companies’ internal control disclosures. When companies disclosed ICMW prior to the restatement announcements, the market reacts negatively to the restatement announcements. When market does not have any prior information on the companies’ internal control quality, there is no negative reaction to the restatement announcements.

Back to Session Listing

AAA Home Page