The Disclosure Of Internal Control Deficiencies And Its Market Reactions Of Cross-Listing Companies In China

The enactment of the Sarbanes-Oxley Act of2002(SOX) has signaled the coming of a new era as to the worldwide researches on the disclosure of internal control related information. With the establishment and improvement of China’s related regulations on such matter, China’s cross-listing companies have to comply with such regulations, which are similar to that of the section404of the SOX since1st January2011. That means those companies have to provide a management’s report on internal control as well as an audit report on internal control by their external auditors in their annual report for the year2011. This change has provided us with better ground to research and compare our internal control disclosures with American ones. Moreover, China’s cross-listing (simultaneously in China mainland, Hong Kong and U.S.) companies are large state owned companies, which has been the first ones in compliance with the SOX and corresponding regulations of China and are able to act as unique samples for research.This thesis selects from this pool of samples--China Eastern Airlines Corporation Limited(CEA) as its principal research case for that it is the first China mainland airlines ever cross listed in the three places and also the fourth of China mainland companies ever cross listed in the three places overall. Given an adequate collection of the annual reports and related documents of CEA, of the regulations of the three markets on the disclosures of internal control, of information concerning how American listed companies comply with the section404of the SOX and how China’s cross listing companies comply with their home regulations and such, the thesis has probed into the different disclosure behaviors of China’s cross listing companies like CEA in different markets and what might cause the differences. In addition, the thesis has investigated the market reactions to the same disclosures in the three different places based on the CEA case by event study in an attempt to understand and compare the market reactions in the three different stock markets to the same disclosures. Based on the above research, it is found that because of the strict regulation of the section404of the SOX, China’s cross listing companies which listed in U.S. has effectively improved their disclosures of internal control and thereof materially enhanced their internal control systems; the three markets all bear reactions to the signals conveyed by the disclosures of internal control deficiencies and its remedies and the reaction trends are similar holistically; the difference between how American listed companies and Chinese ones disclose their internal control material weaknesses is significant.