Internal Control Weaknesses and Acquisition Performance

• 成果类型: Article
• 署名作者: Harp, Nancy L.; Barnes, Beau Grant
• 署名单位: Clemson University; Washington State University
• 刊物名称: ACCOUNTING REVIEW
• ISSN/ISSBN: 0001-4826
• DOI: 10.2308/accr-51780
• 发表日期: 2018
• 页码: 235-258
• 关键词: sarbanes-oxley act; financial-reporting quality; section 404 disclosures; free cash flow; control deficiencies; contracting evidence; accounting research; acquiring firms; returns; equity

摘要

This study examines internal control weaknesses (ICWs) reported under Sarbanes-Oxley (SOX) Section 302 in the context of mergers and acquisitions. We predict that problems in an acquirer's internal control environment have adverse operational implications for acquisition performance. We argue that acquirers with low-quality internal information needed to select profitable acquisitions will make poorer acquisition decisions. We also argue that ICWs impede effective monitoring and are likely to hinder integration tasks that are important to acquisition profitability. We find that ICWs disclosed prior to an acquisition announcement predict significantly lower post-acquisition operating performance and abnormal stock returns. Poorer post-acquisition performance is concentrated in ICWs that are expected to impede acquisition activities (i.e., forecasting/valuation, monitoring, and integration). Our findings contribute to the literature linking ineffective internal control over financial reporting to negative operational outcomes. We also contribute to the SOX cost-benefit debate by documenting a previously unidentified benefit of ICW disclosures.