Research On The Market Reactions Caused By The Disclosure Of Internal Control Weakness

“Sarbanes-Oxley Act” issued by America in 2002 causes countries’ government to pay more attention on the internal control, and it also provides a reference for countries on their own internal control information disclosure standards. Five ministries and commissions issued “Internal Control Standards” In 2008, and released “Enterprise Internal Control Guidelines” in 2010.The guidelines clearly request listed companies to evaluate the effectiveness of the internal control activities of the organizations and public the internal control self-assessment report, while hiring an accounting firm to evaluate the effectiveness of internal control activities and public internal control audit reports, so to ensure well-ordered internal control issued by the internal self-examination and external auditing work together. Since then our internal control disclosure began to shift from voluntary stage to mandatory stage. The disclosure of internal control weakness plays an important part of internal control evaluation, causing the attention of all parties. The United States and other countries generally require companies to disclose the self-evaluation of internal control over financial reporting. The “Internal Control Evaluation Guidelines” of our country requires companies to evaluate the company’s internal control based on the five elements of internal control. It requires listed companies to disclose internal control weakness over financial reporting and internal control weakness over non-financial reporting respectively. Theorists have greater controversy, many scholars believe that in the current economic situation of our country we should reduce disclosure requirements and disclose internal control weakness over financial reporting only. This article broadens the scope of the study of internal control theory, and explores the impact of the disclosure of internal control weakness on these companies own, regulators and investors.This paper uses the event study method and selects these listed companies which in2013 and 2014 disclose the internal control weakness in internal control self-evaluation reports as the research sample, it selects control group based on the sample characteristics and studies the market reactions caused by the disclosure of internal control weakness. The results show that the internal control weakness does cause lower market reactions. In thispaper, the internal control weakness is subdivided into two categories: one is internal control weakness over financial reporting, the other is internal control weakness over non-financial reporting, then it studies market reactions caused by the disclosure of internal control weakness, exploring whether internal control weakness over financial reporting and internal control weakness over non-financial reporting affect investors’ decisions.The innovation is to study market reactions caused by the disclosure of internal control weakness over financial reporting and the disclosure of internal control weakness over non-financial reporting on the basis of the study of market reactions caused by the disclosure of internal control weakness This paper draws a conclusion that in the window period there exists differences between the sample group and the control group, and the data also shows that the disclosure of internal control weakness and the cumulative abnormal returns have a negative relationship, that will result in a lower market reactions.The study about internal control weakness over financial reporting and internal control weakness over non-financial reporting still exist in the above-mentioned phenomenon, thus the disclosure of internal control weakness over non-financial reporting is desirable. This paper further proposed suggestions that can urge the relevant regulatory authorities to disclose internal control weakness policies and to strengthen the education and guidance to investors, listed companies should combine rules with its own characteristics when evaluate their own internal control, improving the quality of the disclosure of internal control weakness, and promoting the establishment and implementation of the internal control system, and the investors should pay close attention to the disclosure of the internal control weakness.