The Effect of SOX Internal Control Deficiencies on Firm Risk and Cost of Equity

The Effect of SOX Internal Control Deficiencies on Firm Risk and Cost of Equity ABSTRACT The Sarbanes‐Oxley Act (SOX) mandates management evaluation and independent audits of internal control effectiveness. The mandate is costly to firms but may yield benefits through lower information risk that translates into lower cost of equity. We use unaudited pre–SOX 404 disclosures and SOX 404 audit opinions to assess how changes in internal control quality affect firm risk and cost of equity. After controlling for other risk factors, we find that firms with internal control deficiencies have significantly higher idiosyncratic risk, systematic risk, and cost of equity. Our change analyses document that auditor‐confirmed changes in internal control effectiveness (including remediation of previously disclosed internal control deficiencies) are followed by significant changes in the cost of equity that range from 50 to 150 basis points. Overall, our cross‐sectional and intertemporal change test results are consistent with internal control reports affecting investors' risk assessments and firms' cost of equity. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Accounting Research Wiley

The Effect of SOX Internal Control Deficiencies on Firm Risk and Cost of Equity

Loading next page...
 
/lp/wiley/the-effect-of-sox-internal-control-deficiencies-on-firm-risk-and-cost-PSYn1hhXwI
Publisher
Wiley
Copyright
©, University of Chicago on behalf of the Institute of Professional Accounting, 2008
ISSN
0021-8456
eISSN
1475-679X
D.O.I.
10.1111/j.1475-679X.2008.00315.x
Publisher site
See Article on Publisher Site

Abstract

ABSTRACT The Sarbanes‐Oxley Act (SOX) mandates management evaluation and independent audits of internal control effectiveness. The mandate is costly to firms but may yield benefits through lower information risk that translates into lower cost of equity. We use unaudited pre–SOX 404 disclosures and SOX 404 audit opinions to assess how changes in internal control quality affect firm risk and cost of equity. After controlling for other risk factors, we find that firms with internal control deficiencies have significantly higher idiosyncratic risk, systematic risk, and cost of equity. Our change analyses document that auditor‐confirmed changes in internal control effectiveness (including remediation of previously disclosed internal control deficiencies) are followed by significant changes in the cost of equity that range from 50 to 150 basis points. Overall, our cross‐sectional and intertemporal change test results are consistent with internal control reports affecting investors' risk assessments and firms' cost of equity.

Journal

Journal of Accounting ResearchWiley

Published: Mar 1, 2009

References

You’re reading a free preview. Subscribe to read the entire article.


DeepDyve is your
personal research library

It’s your single place to instantly
discover and read the research
that matters to you.

Enjoy affordable access to
over 18 million articles from more than
15,000 peer-reviewed journals.

All for just $49/month

Explore the DeepDyve Library

Search

Query the DeepDyve database, plus search all of PubMed and Google Scholar seamlessly

Organize

Save any article or search result from DeepDyve, PubMed, and Google Scholar... all in one place.

Access

Get unlimited, online access to over 18 million full-text articles from more than 15,000 scientific journals.

Your journals are on DeepDyve

Read from thousands of the leading scholarly journals from SpringerNature, Elsevier, Wiley-Blackwell, Oxford University Press and more.

All the latest content is available, no embargo periods.

See the journals in your area

DeepDyve

Freelancer

DeepDyve

Pro

Price

FREE

$49/month
$360/year

Save searches from
Google Scholar,
PubMed

Create folders to
organize your research

Export folders, citations

Read DeepDyve articles

Abstract access only

Unlimited access to over
18 million full-text articles

Print

20 pages / month

PDF Discount

20% off