Material Weakness and Stock Prices? 998

  • I have been trying to find out if there are any studies on potential correlation between the number of material weaknesses disclosed and the stock prices behaviour of a public company.
    Unfortunatelly, all I could find was a brief summary of a study conducted in 2004, which means before Sarbanes-Oxley Act.
    Does anyone know where I could find something more up-to-date? I need it for my master thesis.
    Thanks in advance.

  • I have some papers issued. If you want I can send it by e-mail.

  • Thanks Angie.
    That would be great if you could mail them to:

  • Article: How Markets Punish Material Weaknesses
    by Marie Leone,
    ‘On average, the day after a company disclosed a material weakness in its financial controls, its share price dropped 0.67 percent relative to market movement, Glass Lewis found.
    After 7 days, the share price dropped 0.90 percent; after 30 days, 1.96 percent; and after 60 days, 4.06 percent.
    The mere announcement of a material weakness, independent of the auditor opinion, appears to solicit a negative reaction from investors’
    Even more important (and strange)
    ‘And as for late filers? Companies that let their deadline pass ’ without filing a management report or auditor opinion on the effectiveness of internal controls,saw their share prices drop an average of 2.13 percent after one day; after 7 days, 2.89 percent; after 30 days, 3.81 percent; and after 60 days, 7.01 percent.’
    I will never say again: Better late than never

  • Thanks, Lekatis.
    I have already mentioned the study conducted in 2004. Well, in this study they came up with similar conclusions - it seems that a late filing date harms company’s prices even more than a material weakness disclosure. They also figured out that the more information a company disclosed about the material weakness, the less its stock prices dropped (makes sence though).
    However, it is still somehow surprising to me how little the financial markets react to disclosed material weaknesses. I would have expected a stronger effect.

  • Angie, thank you so much.
    I have sent you an e-mail too.

Log in to reply