 |
An International Meeting of American Accounting
Association
|
Market Uncertainty and Disclosure of Internal Control Deficiencies Under the Sarbanes-Oxley Act |
Yongtae Kim
Santa Clara University
Myung Seok Park
Virginia Commonwealth University
Abstract: This study examines the cross-sectional difference of stock market reactions to disclosures of internal control deficiencies under Section 302 of the Sarbanes-Oxley Act. We hypothesize that the market punishment for internal control problems will be less severe for an internal control disclosure that helps reduce market uncertainty around the disclosure. Consistent with our hypothesis, we find that when firms disclose their internal control deficiencies, their abnormal stock returns are negatively associated with changes in the standard deviations of daily stock returns around disclosures. The analysis with financial analysts’ earnings forecasts dispersion as an alternative proxy for uncertainty confirms the results. We also find that a negative relation between market reactions and changes in market uncertainty caused by the internal control disclosure appears only for “voluntary” disclosures of internal control deficiencies that are less severe than the level of material weakness.