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.
Access to external full text or publisher's version may require subscription.
Full-text Version
Publisher’s Version
Language
English
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
