The information content of internal controls legislation: Evidence from material weakness disclosures.

摘要

This paper examines the information content of internal controls legislation, as mandated by Sections 302 and 404 of the Sarbanes-Oxley Act of 2002. I draw on two conventional measures of information content---stock return volatility and trading volume---and find that these two measures exhibit a statistically larger event period reaction to firms' initial material weakness disclosures relative to an adjacent non-event period and to a matched sample of control firms. In the multivariate setting, I find a significant, positive relation between the material weakness variable and both information content measures after controlling for multiple other sources of event period news. In an additional test of informativeness, I find support for the hypothesis that Section 404 disclosures are incrementally informative to the initial Section 302 disclosures. Collectively, the evidence suggests that investors respond to the information contained in material weakness disclosures, consistent with these disclosures providing an additional piece of value-relevant news for investors to consider in making resource allocation decisions.