In this study, we examine whether and how internal control over financial reporting affects firmoperational efficiency. We find that operational efficiency, derived from the frontier analysis, issignificantly lower among firms with material weaknesses in internal control relative to firmswithout such weaknesses. We document some evidence suggesting that effective internal controlleads to greater operational efficiency through reducing the likelihood of misappropriation ofcorporate resources and through enhancing the quality of internal reports for decision making.We also document that smaller firms benefit more from having effective internal control in termsof operational efficiency. In addition, we find that the market appears to understand the effect ofineffective internal control on operational efficiency: within firms with internal control materialweakness, those with more negative market reaction experience a larger deterioration inoperational efficiency. Lastly, we find that the firms that remediate their material weaknessessubsequently experience an improvement in operating performance and stock returns, and thiseffect is mainly driven by the improvement in operational efficiency. Overall, our study extendsthe literature by presenting systematic evidence on the effects of effective internal control onoperational efficiency and firm performance.
Accounting | Corporate Finance
Corporate Reporting and Disclosure
Four-school conference, Bejing, China, 2014 October 1
City or Country
CHENG, Qiang; GOH, Beng Wee; and KIM, Jae Bum.
Internal control and operational efficiency. (2014). Four-school conference, Bejing, China, 2014 October 1. Research Collection School Of Accountancy.
Available at: http://ink.library.smu.edu.sg/soa_research/1619
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