Internal Control Weaknesses, Corporate Governance and the Informativeness of Earnings

In this study I examine whether market discounts the information content of accounting earnings for firms reporting material weaknesses under Section 404 of SOX. To explore the influence of managerial ownership, I examine whether managerial ownership moderates the negative consequences of material weakness disclosures and whether its impact depends on the magnitude of information asymmetry. To explore the influence of female executives, I examine whether the presence of female executives moderates the negative consequences of material weakness disclosures and whether its impact depends on the magnitude of information asymmetry.;Because the macroeconomic environment changes after the financial crisis, I focus on the sample period from 2004 to 2007, and a sample of 2,349 firm-year observations yields the following results. First, regardless of the moderating effects of managerial ownership or female executives, the results do not indicate a significantly negative impact of material weakness disclosures under Section 404 of SOX on the informativeness of earnings. Second, consistent with the argument that managerial ownership reduces agency costs, I find that managerial ownership moderates the negative impact of material weaknesses on the informativeness of earnings. Third, because the magnitude of information asymmetry decreases with firm age, I find that the moderating effect of managerial ownership diminishes with firm age. Fourth, consistent with the argument that female executives are more risk-averse and therefore ensure the quality of accounting earnings, I find that the presence of female executives moderates the negative impact of material weaknesses on the informativeness of earnings. Fifth, I find that the moderating effect of female executives also diminishes with firm age. These results are robust to a number of additional tests.;Keywords: the Informativeness of Earnings, Internal Control, Material Weaknesses, Managerial Ownership, Female Executives, Information Asymmetry. .