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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.



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Corporate Reporting and Disclosure


American Accounting Association Annual Meeting, Chicago, Illinois, United States, 2015 August 1;European Accounting Association Conference, Glasgow, US, 2015 April 1;Four-school conference, Bejing, China, 2014 October 1;American Accounting Association Annual Meeting, Anaheim CA, US, 2008 August 1



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Chicago, Illinois, United States

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Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

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