The Impact of Meeting Analyst Earnings Expectations on the Market Response to the Announcement of Internal Control Weaknesses
In this study, I examine the impact of meeting analyst earning expectations on the market response to material weakness disclosures identified under Sections 302 and 404 of the Sarbanes-Oxley Act of 2020. Utilizing a sample period spanning 15 years, I find that the market response to material weakness disclosures is significantly influenced by earnings outcomes. The market response to 404 material weakness disclosures for firms that missed earnings is 1.7% lower than firms that met or beat earnings expectations, while the market response to 302 material weakness disclosures is 2.1% lower for firms that missed earnings. I find evidence that new material weaknesses disclosed under SOX 404 are associated with more negative market response compared to repeating material weaknesses, however no such difference exists for material weaknesses disclosed under SOX 302. I also find that the number of material weaknesses disclosed under SOX 302 and 404 is on the rise over the past decade.
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