Title

Do Section 404 Disclosures Affect Investors' Perceptions Of Information Systems Reliability And Stock Price Predictions?

Keywords

General system controls; Information systems reliability; Internal control; Investor judgment; Risk propensity; Sarbanes-Oxley Section 404

Abstract

This paper examines the impact of Sarbanes-Oxley Act (2002) Section 404 disclosures regarding internal controls over financial reporting on investors' information systems (IS) reliability assessments and stock price predictions. Prior research shows that Section 404 disclosures signal differences in the quality of company financial information. However, research on how Section 404 disclosures impact financial markets shows mixed results. In order for Section 404 information to affect stock prices, users must access that information, assess its implications, and incorporate those implications into their decision processes. We investigate the stages of this process through an experiment using a 10-K filing adapted from an actual company, utilizing process-tracing software to record information access. Two versions of the case were used to manipulate the type of Section 404 opinion, noting effective or ineffective control systems. Results show that professional investors are more likely to access Section 404 information than nonprofessionals. Also, our findings imply that professional investors have a lower baseline expectation of reliability that increases on learning of effective controls, while nonprofessionals have a higher baseline expectation of reliability that declines on learning of ineffective controls. While IS reliability is positively associated with nonprofessionals' stock price predictions, there is no such association for professionals. These findings help explain the mixed results in past archival studies. Prior results on market response to Section 404 information may be due in part to failure to access Section 404 reports, and to the low weighting placed on IS reliability by financial professionals. © 2011 Elsevier Inc.

Publication Date

12-1-2011

Publication Title

International Journal of Accounting Information Systems

Volume

12

Issue

4

Number of Pages

243-258

Document Type

Article

Personal Identifier

scopus

DOI Link

https://doi.org/10.1016/j.accinf.2011.05.001

Socpus ID

80455155166 (Scopus)

Source API URL

https://api.elsevier.com/content/abstract/scopus_id/80455155166

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