Journal of Applied Finance & Banking

Internal Control Weakness and Information Quality

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• Abstract

  This paper explores the effect of internal control weaknesses (hereafter ICW) and their remediation on information precision for firms who filed Section 404 reports with the SEC. First, we find that the presence of ICW is associated with lower precision of both public and private information. Second, we find that the effect of ICW on public information precision is stronger for firms with firm-level ICW than for those with account-specific ICW. However, we find no such a relation for private information precision. Third, we find that the precision of both private and public information are higher for firms remedying previous weaknesses relative to firms who do not remedy their weaknesses. Further analyses indicate that overall information uncertainty is higher for ICW firms than non-ICW firms. However, we find no difference in consensus among investors between ICW and non-ICW firms. The results suggest that lower precision of public information is offset by lower precision of private information such that consensus among investors is not affected. Finally, we find that firms with different internal control opinions in successive years exhibit changes in precision of public and private information, consistent with our prediction.