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

Maria Ogneva
University of Southern California

Kannan Raghunandan
Florida International University

K.R. Subramanyam
University of Southern California

Abstract: Section 404 of the Sarbanes-Oxley Act (SOX) requires every company to report on the effectiveness of internal controls over financial reporting in the 10K filings with the SEC. In this paper, we examine the association between implied cost of equity and internal control effectiveness for firms that filed Section 404 reports with the SEC and also for firms that disclosed internal control problems under Section 302. We find marginally higher cost of equity for firms disclosing material weakness in internal controls than for a sample of control firms disclosing no material weaknesses. The differences in cost of equity generally persist after controlling for known risk fa

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