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Dynamic internal control performance over financial reporting and external financing

journal contribution
posted on 2012-12-01, 00:00 authored by Wei ShiWei Shi, Rencheng Wang
In this paper, we present a theoretical model and empirical evidence on the effects of dynamic internal control performance on external financing choices of a company. Using both within-sample and difference-in-difference analysis, we find that after issuing internal control weakness (i.e. ICW) reports under SOX 404, the ICW companies rely more on debt financing and less on equity financing than in previous periods. This effect is more pronounced for the companies with low ex ante probability of internal control weakness. In addition, we show that after correcting the previously reported ICWs, these ICW companies rely more on equity as opposed to debt financing. This result is more pronounced for smaller companies. Our findings suggest that increased (decreased) information asymmetry induced by ineffective (effective) internal control over financial reporting leads a company to follow specific external financing choices to meet its financial deficits.

History

Journal

Journal of contemporary accounting & economics

Volume

8

Issue

2

Pagination

92 - 109

Publisher

Elsevier

Location

Amsterdam, The Netherlands

ISSN

1815-5669

Language

eng

Publication classification

C1.1 Refereed article in a scholarly journal

Copyright notice

2012, Elsevier Ltd.

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