گزارش کنترل داخلی و نقدینگی بازار
|کد مقاله||سال انتشار||تعداد صفحات مقاله انگلیسی||ترجمه فارسی|
|13746||2013||11 صفحه PDF||سفارش دهید|
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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Research in Accounting Regulation, Volume 25, Issue 1, April 2013, Pages 30–40
We investigate the impact of the Sarbanes-Oxley Act of 2002 (SOX) on information asymmetry by analyzing the relation between SOX Sections 302 and 404 control reports and market liquidity using bid-ask spreads. Lower market liquidity indicates higher levels of information asymmetry implying that market participants perceive financial statement misstatement risk is higher. If SOX disclosures contain relevant information, then one would expect firms reporting internal control material weaknesses to have lower market liquidity. Accordingly, we find that market liquidity is lower (i.e., bid-ask spreads are higher) for firms reporting ineffective control compared to firms reporting effective control using either annual SOX 404 internal control reports or quarterly SOX 302 disclosure control reports, which suggests that SOX 302 and 404 reports provide useful information for identifying firms with a higher risk of financial statement misstatement. However, we do not find consistent results using two alternative liquidity measures: trading volume and market quality indices. We then examine whether changes in control reports are associated with changes in market liquidity. We generally do not find that firms with improved (deteriorated) control reports experience a larger decrease (increase) in bid-ask spreads or larger increases (decreases) in trading volume and market quality indices compared to other firms, suggesting that market participants do not discern a change in information asymmetry when the effectiveness of internal controls over financial reporting changes.
An effective process of capital allocation based on reliable and relevant information provides an efficient and liquid market for buying and selling securities (AICPA, 1994). Market liquidity deteriorated at the beginning of the 21st century due to a number of high-profile accounting scandals (Jain, Kim, & Rezaee, 2008). In response, the United States Congress passed the Sarbanes-Oxley Act of 2002 (SOX) to improve the reliability of financial reporting. We investigate whether required reports under part of that legislation, specifically, Sections 302 (disclosure controls) and 404 (internal controls over financial reporting), affect market liquidity. Jain et al. (2008) assess the impact of accounting scandals and SOX on the market’s liquidity as a whole, finding that the legislation led to an improvement in market liquidity. But they do not examine the effect of the internal control reports on market liquidity for individual firms. At the firm level, most extant SOX research focuses primarily on the characteristics of firms reporting weaknesses as well as the impact of ineffective reports on stock prices, cost of capital, and analysts’ forecasts, with very little investigation of the impact of a reported internal control material weakness on market liquidity (e.g., Beneish, Billings, & Hodder, 2008). Lev (1988) suggests that disclosure regulations should be evaluated based on their effect on information asymmetry as measured by market liquidity, rather than based on stock-price reactions, because information may be useful without causing any change in the stock price. Thus, market liquidity provides an important additional source of evidence, beyond stock prices, about the impact of SOX and the value of its internal control weakness disclosures. Whereas Jain et al. (2008) report that market liquidity (at the macro-level) improved subsequent to the SOX legislation, we expect market liquidity to differ between firms reporting effective controls and those reporting ineffective controls. Our reasoning is that material weaknesses in internal control potentially indicate a higher risk of material misstatement in the financial statements. This higher risk increases information asymmetry, which, in turn, reduces market liquidity. Therefore, we investigate two questions on the relation between SOX 302 and 404 control reports and market liquidity using bid-ask spreads, an accepted measure of information asymmetry (e.g., Frino and Jones, 2005, Glosten and Milgrom, 1985, Gregoriou et al., 2005, Hagigi et al., 1993 and Kanagaretnam et al., 2005). First, we investigate whether market liquidity is lower (i.e., bid-ask spreads are higher) for firms reporting ineffective internal control compared to firms reporting effective internal control. Consistent with the Beneish et al. (2008) results for SOX 302 reports during 2004, we find this to be the case based both on our sample of annual SOX 404 internal control reports and on our expanded sample of quarterly SOX 302 disclosure controls reports during 2004 through 2007. Lower market liquidity provides evidence of higher information asymmetry, which in turn indicates that market participants consider the financial statements of firms with control weaknesses to be less reliable. Such evidence also provides support that SOX 302 and 404 reports are useful to investors. However, we find mixed results on this first question using two alternative liquidity measures: trading volume and market quality indices. Second, we investigate whether changes in internal control or disclosure control reports are associated with changes in market liquidity. This provides a stronger test of the linkage between the SOX 404/302 reports and market liquidity. For annual SOX 404 reports, we generally do not find that firms with improved control reports (current report shows effective control but prior report showed ineffective) experience a larger decrease in bid-ask spreads compared to other firms. Additionally, firms with deteriorated control reports (current report shows ineffective control but prior report showed effective) do not experience a larger increase in bid-ask spreads compared to other firms. Thus, there is no evidence of change in information asymmetry when internal controls over financial reporting change from ineffective to effective (effective to ineffective). For the quarterly SOX 302 reports, both improving and deteriorating firms experience a larger decrease in bid-ask spreads compared to other firms due to a higher frequency of change reports (improve or deteriorate) occurring in the fiscal fourth quarter, which also has lower bid-ask spreads. When our SOX 302 sample is limited to interim quarters, the results are similar to those for the SOX 404 reports: no evidence that improved (deteriorated) reports are associated with decreases (increases) in bid-ask spreads. The implication again is that the market participants do not discern a change in information asymmetry when the SOX 302 report changes. Using our alternative liquidity measures, trading volume and market quality indices, we also generally find that improved (deteriorated) SOX 404 and 302 reports are not associated with increases (decreases) in market liquidity. The remainder of this paper is organized as follows. Section two provides the background and research questions. Section three discusses the sample and the results. Section four concludes.
نتیجه گیری انگلیسی
Regulated disclosures have the potential of reducing information asymmetry and thus improving market liquid- ity. Such was the purpose of SOX—to improve the reliabil- ity of financial reporting in response to numerous high- profile accounting scandals. Subsequent to the passage of the legislation, the relevant question is what is the effect of the regulation? We investigate whether parts of that legislation—reports on disclosure control and ICFR—help market participants assess the reliability of a firm’s finan- cial statements and consequently impact market liquidity by comparing firms that report effective controls with firms that report ineffective controls. We use bid-ask spreads as the primary measure of market liquidity. We find that firms reporting material weaknesses in either SOX 404 or SOX 302 reports have higher bid-askspreads compared to firms reporting effective ICFR or dis- closure controls. However, the higher bid-ask spreads for these firms may be caused by an omitted variable rather than the reported material weaknesses. Additionally, we find only limited evidence that material weaknesses are associated with lower trading volume and market quality indices. Our examination of whether changes in internal control reports from one period to the next affect bid-ask spreads, trading volume, and market quality indices pro- duces insignificant results. Using annual SOX 404 and quarterly SOX 302 reports, we generally do not find evidence that improvement or deterioration in internal controls is associated with a corresponding change in our three market liquidity measures. It may be that only certain changes in internal control, i.e., entity-level control changes, cause market liquidity changes. Our analysis does not separate entity-level from transaction-level weak- nesses. We leave such an analysis for future research. Our research also does not address the issue of whether these particular parts of the overall legislation caused firms to improve their internal controls or whether the cost of the regulation is higher than the benefits. Instead, our re- search provides insight into the benefit of the legislation by examining whether the SOX 302 and 404 reports and changes in them are associated with a perceived risk of financial statement misstatement. We find some evidence that market participants perceive that (1) effective disclo- sure controls and (2) effective ICFR are associated with lower risk of financial statement misstatement. Our research suggests that the unaudited SOX 302 re- ports are useful for evaluating the risk of financial state- ment misstatement. However, we observe that the frequency of ineffective Section 302 reports is higher in the fourth quarter compared to other quarters. This result may be related to the SOX 404 audit requirement. Conse- quently, we hesitate to suggest that Section 302 reports alone would be sufficient. In summary, it appears that not only did the SOX legislation improve overall market liquidity at time of passage ( Jain et al., 2008 ), but SOX 302 and 404 reports appear to continue to provide useful information for identifying firms with a higher risk of financial statement misstatement