Information Content of Internal Control Weaknesses : The Evidence from Japan

We examine Japanese stock market responses to the disclosure of internal control weaknesses (ICW), especially in relation to other information released around the disclosure date and to firm attributes. Japan is classified as a code-law country, where corporate disclosure tends to be less timely than in a common-law country. Indeed, for the first two years, the disclosure rate of ICW has been much lower in Japan than in the US. Our standard event study analysis shows that the mean cumulative abnormal returns for all firms disclosing ICW are not significantly different from zero. However, after controlling for firms with effective internal control, other information released around the disclosure date and firm attributes, we find that the disclosure of ICW negatively affects stock prices. Our results indicate that the disclosure of ICW is informative to the market, because it is rare and exceptional in Japan