Mandatory internal control audits and management earnings forecast

Yanchun Xia, Huan Zhang and Shijun Guo

Pacific-Basin Finance Journal, 2024, vol. 85, issue C

Abstract: This study examines how the change in mandatory internal control audits (MICAs) affects the accuracy of management earnings forecasts. Using the staggered introduction of MICAs in China as an exogenous shock, we find a significant reduction in management earnings forecast errors following the introduction of MICAs. In addition, we find that the introduction of MICAs helps decrease management earnings forecast errors by enhancing the effectiveness of internal control reporting and increasing the quality of financial reporting. We also find that the informativeness of management earnings forecasts increases after the introduction of MICAs. Collectively, our results highlight the vital role of MICAs in the capital market and have implications for jurisdictions where MICAs have been carried out or are being considered for implementation.

Keywords: Internal control audits; Earnings forecasts; Information disclosure; Management forecast accuracy (search for similar items in EconPapers)
JEL-codes: G34 M41 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:85:y:2024:i:c:s0927538x24001136

DOI: 10.1016/j.pacfin.2024.102362

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