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

Jim Irving
University of North Carolina at Chapel Hill

Abstract: This paper examines the information content of internal controls legislation, as mandated by Sections 302 and 404 of the Sarbanes-Oxley Act of 2002. I draw on two conventional measures of information content – stock return volatility and trading volume – and find that these two measures exhibit a statistically larger event period reaction to firms’ initial material weakness disclosures relative to an adjacent non-event period and to a matched sample of control firms. In the multivariate setting, I find a significant, positive relation between the material weakness variable and both information content measures after controlling for multiple other sources of event period news. Collectively, the evidence suggests that investors respond to the information contained in material weakness disclosures, consistent with these disclosures providing an additional piece of value-relevant news for investors to consider in making resource allocation decisions.

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