This paper investigates whether changes in internal control weakness (ICW) disclosure regulation affect the reliability of a firm’s disclosed ICW in a unique Canadian setting. In Canada, public firms have been required to provide internal control weakness disclosures since 2006. However, the credibility enhancement mechanisms (i.e., the implementation of effectiveness evaluation and CEO/CFO certification) were not adopted until 2008. Taking advantage of such an evolutionary process of regulations and inferring the reliability of the disclosed ICW from the magnitude of the negative association between disclosed ICW and investment efficiency, I first document that in the pre-adoption period, the association between Canadian firms’ disclosed ICW and their investment efficiency is insignificant; however, in the post-adoption period, the disclosed ICW negatively affects firms’ investment efficiency. This finding suggests that the credibility enhancement mechanisms improve the reliability of disclosed ICW in Canada. In addition, using the U.S. sample as a benchmark, I find that in the post-adoption period, the association is weaker between Canadian firms’ disclosed ICW and their investment efficiency, which is consistent with my prediction that the external audit requirement increases the reliability of the disclosed ICW. Overall, the study implies that changes in disclosure regulation lead to efficient resource allocation by improving the reliability of the information disclosed.
| Identifer | oai:union.ndltd.org:TORONTO/oai:tspace.library.utoronto.ca:1807/65443 |
| Date | 19 June 2014 |
| Creators | Liu, Yanju |
| Contributors | Callen, Jeffrey, Wong, Franco |
| Source Sets | University of Toronto |
| Language | en_ca |
| Detected Language | English |
| Type | Thesis |
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