Does the value of cash holdings deteriorate or improve with material weaknesses in internal control over financial reporting?

Pinghsun Huang, Jun Guo, Tongshu Ma, Yan Zhang

Research output: Contribution to journalArticlepeer-review

14 Citations (Scopus)

Abstract

We find that cash holdings are more valuable for firms disclosing material weaknesses in the Sarbanes-Oxley (SOX) 404 internal control assessments. We estimate that the value spread for firms with weak controls vs. effective controls is about $0.25 for an extra dollar of cash. Our results are not driven by account-level weaknesses but by more severe, company-level weaknesses in internal control over financial reporting (ICFR). Further, the economic consequences of cash resources significantly decrease with the remediation of previously reported material weaknesses. These results suggest that the favorable (precautionary) impact induced by weak ICFR appears to more than offset the adverse (agency) effect entailed by ineffective ICFR. Overall, our results survive alternative variable specifications, sample splits, matched sample analyses, and a variety of controls.

Original languageEnglish
Pages (from-to)30-45
Number of pages16
JournalJournal of Banking and Finance
Volume54
DOIs
Publication statusPublished - 2015 May 1

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

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