We propose reduced investment as a potential explanation for why firms with internal control weakness (ICW) exhibit lower valuation relative to non-ICW firms. We show that ICW firms significantly reduce investment around ICW disclosure and also have poor stock performance. Additional evidence...

We examine why many firms disclose internal control weaknesses (ICW) under section 404 of Sarbanes-Oxley Act after previously reporting effective internal control (IC). We find that about half of the cross-sectional ICW determinant variables either do not change significantly from Year T-1 to...

We find that firms reporting internal control material weakness (ICW) under Section 404 of Sarbanes-Oxley Act have 13% lower valuation than non-ICW firms based on Tobin's q. This valuation difference is mainly driven by stock underperformance of more than 13% during the year before ICW...