مقاله انگلیسی رایگان در مورد ضعف کنترل داخلی، سرمایه گذاری و ارزیابی شرکت – الزویر ۲۰۱۸

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 shows that many of the investment reductions have been announced during the year before ICW disclosure. A possible explanation for investment reductions is the higher costs of financial friction associated with ICW. Consistent with this explanation, we show that ICW firms with credit ratings do not reduce their investment as much and have much better stock performance than ICW firms without credit ratings.

Introduction

Ashbaugh-Skaife et al. (2009) document that when firms report ICW1 under SOX 4042 , their costs of equity increase in the range of 50 to 150 basis points. Their costs of debt are also higher (Dhaliwal et al., 2011). These changes should cause sizeable shifts in firm value. However, the market reaction to ICW announcement is mostly insignificant (Ogneva et al., 2007; Beneish et al., 2008). A possible explanation is that stock prices have already incorporated much of the information related to ICW during pre-disclosure years (Beneish et al., 2008; Ghosh and Lee, 2013). Consistent with this argument, Li et al. (2016) find that firms reporting ICW under SOX 404 underperform non-ICW firms by about 13% during the year prior to ICW disclosure. However, this argument does not answer a critical question: what is the channel through which investors incorporate the negative ICW information? In this paper, we fill this gap by testing a possible explanation for the lower valuation of ICW firms: investment reductions around ICW disclosure. The traditional q-theory of investment (Brainard and Tobin, 1968; Tobin, 1969) suggests that managers optimally adjust the supply of assets to changes in their market value. Thus Belo et al. (2013) propose that investors can infer a lower firm value if they observe that managers are investing less and vice versa. This argument can be applied to explain the lower valuation of ICW firms. Specifically, if managers realize that the disclosure of ICW at a later date is inevitable, they will expect the cost of capital to increase after the ICW disclosure. Such an increase will reduce the number of profitable real investment opportunities. Therefore, managers may decide to reduce corporate investments well before ICW disclosures are made. When investors learn about plans to reduce investments, they infer a lower firm value, causing the stock of ICW firms to underperform. We call this conjecture the ICW-investment hypothesis. The effects of ICW disclosure may depend on whether a firm has credit rating. The monitoring of debt rating agencies reduces information risk, agency costs, and distortions in managers’ real decisions. Firms with credit rating also face less constraint in capital supply (Faulkender and Petersen, 2006). So ICW may have less effect on costs of capital for firms with credit ratings (Dhaliwal et al., 2011). Therefore, we expect the effects predicted by the ICWinvestment hypothesis to be more pronounced for non-rated ICW firms. Consistent with the ICW-investment hypothesis, we find that ICW firms reduce investments significantly around the year of ICW disclosure year. We find evidence that the markets learn about the investment reductions before ICWs are disclosed. In addition, consistent with the argument that the underperformance of ICW stocks is caused by a reduction in corporate investment, the stocks of ICW firms perform much better in the year before disclosure if they do not subsequently experience investment reductions. The results are more pronounced for ICW firms without credit ratings. The rest of the paper is organized as follows: We describe our sample and present the empirical evidence in in Section 2. Section 3 concludes the paper with some observations about the ICW-investment hypothesis.