Market Reaction Towards Disclosure Of Internal Control Defects

Information disclosure of internal control can influence investors' decisions in that it's a contributing factor for reducing information asymmetry of investors.There was no mandatory policy asking for disclosure of related information ever since internal control mechanism came into practice among enterprises.But due to the Enron Incident and the enactment of Sarbanes-Oxley Act,the disclosure of an annual self-assessment of internal control report has become a compulsory document for every listed company,which will be confronted with audit opinions from third-party organizations in term of its validity.The Internal Control Basic Criteria and Three Guidelines issued in 2011 marked that domestic listed companies stepped into a new phase of mandatory disclosure of internal control.Under the circumstances,for domestic listed companies and domestic market,there's a great necessity to conduct research on following issues and alike: 1)the extent to which information of internal control defect has been disclosed and 2)the validity of information disclosure of internal control defects for investors and markets.Taking Heilongjiang Beidahuang Agriculture Company Limited as the sample,this study presents a continuous tracking analysis on the mandatory information disclosure of internal control,especially focusing on the market reaction towards the disclosure of internal control defects.First,a review of previous research and studies on internal control defects home and abroad and operation mechanism of market reaction towards internal control defects are displayed.second,an analysis on the company's disclosure of internal control defects from2012 to 2016 will be presented,focusing on the major deficiencies appeared in its internalcontrol and the adjustments and improvements followed.Third,based on its adjustments and improvements measures,studies on market reaction towards Beidahuang's disclosure of internal control defects annually will be conducted.This part is a dynamic analysis on market reactions towards information disclosure of internal control defects.Whether there was any market reaction after its first disclosure of internal control defects will be examined,followed by observations on the changes of market reactions in the successive following years,taking market reactions towards disclosure of non-defect internal control into consideration.Last,suggestions for companies and their supervision departments will be listed.The major findings of the present study are: 1)Beidahuang Co.,Ltd's disclosure of major internal control defects bring about significant negative market reaction.And the intensity of market reaction rises with successive disclosure of major internal control defects;2)a valid information disclosure of the company's internal control won't bring about significant positive market reaction;3)being able to make instant market reactions to Beidahuang Co.,Ltd's information disclosure of internal control that has been recognized provides motivations for the company to attach importance to the construction of internal control to perfect the system.Through the analysis on market reaction towards successive mandatory information disclosure of internal control defects,this study has contributing values both theoretically and practically.On one hand,the present study can provide domestic experience for this issue and enrich domestic research in this field.On the other hand,the results of the study can serve as references for enterprises' supervision departments to reinforce governance,for management departments to pay more attention to internal control system and for investors to make clearer identification upon information of internal control defects.