Internal control weakness, investment and firm valuation
Tianze Li and
Steven Xiaofan Zheng
Finance Research Letters, 2018, vol. 25, issue C, 165-171
We propose reduced investment as a potential explanation for why firms with internal control weakness (ICW) exhibit lower valuation relative to non-ICW firms. We show that ICW firms significantly reduce investment around ICW disclosure and also have poor stock performance. Additional evidence shows that many of the investment reductions have been announced during the year before ICW disclosure. A possible explanation for investment reductions is the higher costs of financial friction associated with ICW. Consistent with this explanation, we show that ICW firms with credit ratings do not reduce their investment as much and have much better stock performance than ICW firms without credit ratings.
Keywords: Sarbanes–Oxley act; Internal control weakness; Stock performance; q theory of investments; Benchmark adjusted returns; Credit ratings (search for similar items in EconPapers)
JEL-codes: G12 G14 G30 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:25:y:2018:i:c:p:165-171
Access Statistics for this article
Finance Research Letters is currently edited by R. GenÃ§ay
More articles in Finance Research Letters from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().