Securities Fraud Litigation: Disclosure of Internal Control Material Weakness and Audit Committee Characteristics

• In Event: Governance and Managerial Ability

Abstract

In market reaction tests, we find that declines in stock price on litigation announcement dates are significantly more severe for firms with Sarbanes-Oxley (SOX) section 404 internal control material weakness (MW) opinions involved in the litigation. This severe result is mainly associated with company-wide control material weakness. Also, we observe that this severe market consequence can be mediated by financial experts in audit committees (AC). Our findings suggest that poor internal controls exacerbate investors’ negative perceptions of securities fraud litigation, but the negative perceptions will be remediated by AC members with financially-specialized backgrounds.

Authors

• Yi Cheng Tsai, National Cheng Kung University

• Hua-Wei Huang, National Cheng Kung University