Abstract
| Original language | English |
|---|---|
| Pages (from-to) | 1508-1518 |
| Number of pages | 11 |
| Journal | Journal of Business Research |
| Volume | 67 |
| Issue number | 7 |
| Early online date | 23 Jul 2013 |
| DOIs | |
| Publication status | Published - Jul 2014 |
| Externally published | Yes |
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Bibliographical note
Financial support provided by the Hong Kong Polytechnic University Departmental Research grant (#4-ZZ8S).Keywords
- Implicit contract
- Internal control weakness
- SOX section 404
- Sales growth
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Do customers respond to the disclosure of internal control weakness? / SU, Lixin (Nancy); ZHAO, Xuezhou (Rachel); ZHOU, Gaoguang (Stephen).
In: Journal of Business Research, Vol. 67, No. 7, 07.2014, p. 1508-1518.Research output: Journal Publications › Journal Article (refereed)
TY - JOUR
T1 - Do customers respond to the disclosure of internal control weakness?
AU - SU, Lixin (Nancy)
AU - ZHAO, Xuezhou (Rachel)
AU - ZHOU, Gaoguang (Stephen)
N1 - Financial support provided by the Hong Kong Polytechnic University Departmental Research grant (#4-ZZ8S).
PY - 2014/7
Y1 - 2014/7
N2 - In this study, we investigate the effects of firms' internal control weakness (ICW) disclosures on their customers. We hypothesize that ICW disclosure adversely affects customers' perceptions of firms' ability and incentive to honor implicit commitments to customers, and as such, customers are less willing to buy from such firms. We thus expect a decline in firms' sales growth after ICW disclosure. We find a significant decline in sales growth subsequent to Sarbanes-Oxley (SOX) Section 404 ICW disclosure after controlling for firms' past sales growth and other factors affecting sales performance and internal control. This result is robust to the consideration of selection bias in ICW disclosure. We also find that the decline is more pronounced for firms with company-level ICW disclosure, with industrial customers, in the durable goods industries, with high research and development (RandD) intensity, or without subsequent remediation of ICW. Taken together, these results are consistent with the argument that ICW concerns customers more when the implicit contracts between the firms and their customers are more intensive.
AB - In this study, we investigate the effects of firms' internal control weakness (ICW) disclosures on their customers. We hypothesize that ICW disclosure adversely affects customers' perceptions of firms' ability and incentive to honor implicit commitments to customers, and as such, customers are less willing to buy from such firms. We thus expect a decline in firms' sales growth after ICW disclosure. We find a significant decline in sales growth subsequent to Sarbanes-Oxley (SOX) Section 404 ICW disclosure after controlling for firms' past sales growth and other factors affecting sales performance and internal control. This result is robust to the consideration of selection bias in ICW disclosure. We also find that the decline is more pronounced for firms with company-level ICW disclosure, with industrial customers, in the durable goods industries, with high research and development (RandD) intensity, or without subsequent remediation of ICW. Taken together, these results are consistent with the argument that ICW concerns customers more when the implicit contracts between the firms and their customers are more intensive.
KW - Implicit contract
KW - Internal control weakness
KW - SOX section 404
KW - Sales growth
UR - http://commons.ln.edu.hk/sw_master/5223
UR - https://www.scopus.com/inward/record.uri?eid=2-s2.0-84899963795&doi=10.1016%2fj.jbusres.2013.06.009&partnerID=40&md5=70a607040fb208cf8acaa7fe89b08b62
U2 - 10.1016/j.jbusres.2013.06.009
DO - 10.1016/j.jbusres.2013.06.009
M3 - Journal Article (refereed)
VL - 67
SP - 1508
EP - 1518
JO - Journal of Business Research
JF - Journal of Business Research
SN - 0148-2963
IS - 7
ER -