Market Effects Of Internal Control Weaknesses Disclosure

With the development of economic, internal control, as the internal mechanism of the self-regulation and self-restraint in enterprise production and business activities, plays an important role in the central nervous system. On June28,2008, the Ministry of Finance, Securities and Futures Commission, the Audit Commission, the China Banking Regulatory Commission, and China Insurance Regulatory Commission jointly issued "The Enterprise Internal Control Basic Norms", requiring companies to do self-evaluation of the effectiveness of internal control and provide the report of internal control self-assessment and the report must also be audited by certificated accountants. Since then, internal control information has changed from voluntary disclosures to the stage of mandatory disclosures. In April2010, five ministries issued "Enterprise Internal Control Guidelines" to further strengthen the disclosure requirements of the company’s internal control. In order to ensure the smooth implementation of enterprises’internal control system of norms, the five departments including the Ministry of Finance develop an implementation schedule. Firstly, this regulation will carried out in the Listed companies inside and outside China at the same time since January1,2011; Secondly, since January1,2012, it will expand to the listed company on the Main board in Shanghai Stock Exchange and Shenzhen Stock Exchange.On this basis, the Ministry choose to carry out the regulations in the small board and GEM listed companies, encouraging unlisted medium-sized enterprises going ahead of execution. It’s said, sound internal control, or not, is the key to the success of unit operating. The weaknesses in internal control are the potential risks in companies, gaining the attention of the parties.This article takes this opportunity to study the market reaction to the disclosed internal control weaknesses. This article takes the study sample of disclosures of internal control self-assessment reported in the listed company on the Main Board in Shanghai and Shenzhen,2011. By comparing and analyzing the changes in abnormal return of research samples and control samples, before and after the weaknesses disclosed, we find that during the announcement shorter event period, there are significant differences between the study samples and control samples in abnormal returns. However, in the announcement after a longer event period, the abnormal returns in the study sample aren’t significantly greater than the control sample. Most of Chinese listed company’s internal control self-assessment report and annual report released at the same time, or attached to the annual report disclosure. In order to control the impact of the annual report financial information on the listed company’s share price, they do the multiple regression analysis in abnormal return. We find that the disclosure of internal control weaknesses have negative effects on the abnormal returns. Finally, the article also puts forward policy proposals, hoping providing the empirical evidence for perfecting our internal control information disclosure system.By studying the disclosure of internal control weaknesses’ negative impact on stock market, this article hopes to call external stakeholders to pay attention on the quality of disclosure information in internal control. And this article expects to provide realistic suggestions for the relevant regulatory authorities to perfecting the system of internal control weaknesses disclosed. Therefore, the study of internal control information disclosure, especially the study of internal control weaknesses, has an important theoretical and practical significance.