Management’s Responsibility Acceptance, Locus of Breach, and Investors’ Reactions to Internal Control Reports

• In Event: Investor Reactions to Management Disclosures

Abstract

Using an experimental method, this paper examines the joint effects of two aspects in management’s explanations in the internal control over financial reporting (ICFR): the extent to which management accepts responsibility for the control weakness, and the discussion of the breach leading to the discovery of the control weakness. We find that in the presence of an external breach, investors assign less responsibility to the management and are more willing to invest in the firm when management accept more rather than less responsibility. In contrast, the effect of management’s responsibility acceptance becomes insignificant in the presence of an internal breach. We also find that responsibility assignment affects investment willingness through the perceived severity of the internal control weakness. This study has implications to managers, regulators/standard setters and researchers.

Authors

• Hun Tong Tan, Nanyang Technological University

• Yao Yu, Nanyang Technological University