Title

Do customers respond to the disclosure of internal control weakness?

Document Type

Journal article

Source Publication

Journal of Business Research

Publication Date

7-1-2014

Volume

67

Issue

7

First Page

1508

Last Page

1518

Publisher

Elsevier Inc.

Keywords

Implicit contract, Internal control weakness, Sales growth, SOX section 404

Abstract

In this study, we investigate the effects of firms' internal control weakness (ICW) disclosures on their customers. We hypothesize that ICW disclosure adversely affects customers' perceptions of firms' ability and incentive to honor implicit commitments to customers, and as such, customers are less willing to buy from such firms. We thus expect a decline in firms' sales growth after ICW disclosure. We find a significant decline in sales growth subsequent to Sarbanes-Oxley (SOX) Section 404 ICW disclosure after controlling for firms' past sales growth and other factors affecting sales performance and internal control. This result is robust to the consideration of selection bias in ICW disclosure. We also find that the decline is more pronounced for firms with company-level ICW disclosure, with industrial customers, in the durable goods industries, with high research and development (R&D) intensity, or without subsequent remediation of ICW. Taken together, these results are consistent with the argument that ICW concerns customers more when the implicit contracts between the firms and their customers are more intensive.

DOI

10.1016/j.jbusres.2013.06.009

Print ISSN

01482963

E-ISSN

18737978

Publisher Statement

Copyright © 2013 Elsevier Inc.

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Full-text Version

Publisher’s Version

Recommended Citation

Su, L. N., Zhao, X. R., & Zhou, G. S. (2014). Do customers respond to the disclosure of internal control weakness? Journal of Business Research, 67(7), 1508-1518. doi: 10.1016/j.jbusres.2013.06.009