تاثیر آشکار سازی ضعف کنترل داخلی بر تصمیم گیری شرکت
Abstract
1- Introduction
2- Literature Review and Hypothesis Development
3- Sample, Descriptive Statistics, and Research Design
4- Empirical Tests and Results—ICWs and Financing Decisions
5- Additional Analyses—ICWs and Motivations of Equity Issues
6- Conclusion
Appendix
Notes
References
Abstract
We examine the impact of internal control weaknesses (ICWs) on firms’ financing choices and how firms alter their financing behavior after the mandated disclosure of ICWs. We find that, before disclosure, ICW firms tend to seek external financing more than non-ICW firms do and are more likely to use equity financing as opposed to debt. After the disclosure, however, ICW and non-ICW firms exhibit similar financing preferences. In exploring the motivations for equity financing, we find that ICW firms are more prone than non-ICW firms to use the equity proceeds to fund investments and that this penchant disappears post-disclosure. The overall evidence indicates that ICW disclosure alters the information environment and managerial incentives, which has significant impact on firms’ financing decisions.
Introduction
Information asymmetry and agency conflicts between managers and outside investors are two primary market frictions that affect financiers’ decisions to supply capital to a firm (Jensen & Meckling, 1976; Myers & Majluf, 1984). Given that corporate disclosure plays a critical role in mitigating information asymmetry and agency problems, a large body of literature examines how managers utilize voluntary disclosure strategically in anticipation of external financing activities to influence investors’ perception of firm performance and governance (see, for example, Frankel, McNichols, & Wilson, 1995; Lang & Lundholm, 2000). Relatively, little research looks into whether and how managers alter their financing choices under mandated disclosure in which they are left with little discretion over the information flow. The Sarbanes-Oxley Act (SOX) of 2002 requires firms to disclose material weaknesses in their internal control systems, and this mandatory disclosure limits managerial discretion over influencing the mix of information available to investors. In this study, we investigate how managers adjust their firms’ debt-equity choices after the mandated disclosure of internal control weaknesses (ICWs). To address our research question, we employ a comparison method, similar to Hope and Thomas (2008), by examining how ICW firms differ from non-ICW firms in terms of financing pre-disclosure and whether these differences persist post-disclosure.1 We construct two samples to operationalize the comparison. The predisclosure sample spans from 2000 to 2002 (financing period) with firms having Section 404 reports filed between November 15, 2004 and December 31, 2005 (disclosure period).2 We follow Doyle, Ge, and McVay (2007b) to determine the internal control status of firms in the pre-disclosure sample by assuming that a firm that discloses at least one material weakness during the disclosure period has ICWs during the financing period.3 For the post-disclosure sample, we focus on firms disclosing ICWs for the first time under Section 404 between 2004 and 2008 and examine their financing decisions following the initial disclosure.