Dynamic internal control performance over financial reporting and external financing

Shi, Wei and Wang, Rencheng (2012) Dynamic internal control performance over financial reporting and external financing. Journal of Contemporary Accounting and Economics, 8 2: 92-109. doi:10.1016/j.jcae.2012.05.001

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Author Shi, Wei
Wang, Rencheng
Title Dynamic internal control performance over financial reporting and external financing
Journal name Journal of Contemporary Accounting and Economics   Check publisher's open access policy
ISSN 1815-5669
2352-3298
Publication date 2012-12
Sub-type Article (original research)
DOI 10.1016/j.jcae.2012.05.001
Open Access Status File (Author Post-print)
Volume 8
Issue 2
Start page 92
End page 109
Total pages 18
Place of publication London, United Kingdom
Publisher Elsevier
Language eng
Formatted abstract
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.
Keyword Internal control weakness
Financial reporting quality
External financing
Q-Index Code C1
Q-Index Status Provisional Code
Institutional Status Non-UQ

Document type: Journal Article
Sub-type: Article (original research)
Collection: UQ Business School Publications
 
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Created: Tue, 10 Jun 2014, 12:50:03 EST by Rencheng Wang on behalf of UQ Business School