Internal Control Deficiencies Listed Companies To Disclose Market Reaction

After Enron and other financial scandals, these scandals have seriously damaged the trust andtherefore people come to realize the importance of internal control system, so that theSarbanes Oxley Act (SOX) was introduced. During the internal control processes, there areactual or potential disadvantages and shortcomings which may can’ t achieve the internalcontrol’s objectives. Internal control self-assessment by determining the internal defects, type,severity and take some measures, so that to becoming an important means in enterprises tocontinual improvement the internal control system. Through disclosure of internal controldeficiencies may cause investors doubt the reliability of company’s financial reporting,operating efficiency and compliance with laws and regulations which cause the relatedmarket response. In this thesis, through the study of the market reaction to promote thecompanies’ management pay attention to the disclosure problems of internal control.Paper consists of six parts. The first part consist by research background, purpose andsignificance, research ideas, methods and content. The second part is the literature review,review of the relevant literature of internal control deficiencies disclosed in china and abroadin recent years. The third part introduce the basic theory, based on the definition of internalcontrol weaknesses, focusing on the efficient market theory, stock prices random theory,asymmetric information theory, signaling theory, and build the research assumptions based onanalysis these theoretical. The fourth part empirical analysis, first explained the studyvariables and study sample selection, data sources, and then use the event study method andmeans tests to verify the hypothesis put forward by the third part, get the empirical results inthe end. The fifth study conclusions and policy recommendations which is the disclosure ofthe listed company’s internal control deficiencies can cause a short-term negative marketreaction, and the more severe the defect level may get more negative market reaction; and atargeted manner from the enterprise levels and supervision level to put forward severalsuggestions on perfecting the internal control information disclosure of listed companies, onthe enterprise level is to improve the management awareness of the importance ofinformation disclosure, focusing on the evaluation of internal control system to establish andimprove the internal audit supervision system, improve the corporate governance structure;the regulatory level is the establishment of a unified information disclosure system of internalcontrol, to further expand the scope of mandatory disclosure of internal information,strengthening legal supervision, the illegal responsibilities clearly related to the subjects ofdisclosure. The sixth part point out the contributions and shortcomings of the article.