Market reactions to the disclosure of internal control weaknesses under the Japanese Sarbanes-Oxley Act of 2006

This article investigates how the stock market reacts to the disclosure of internal control deficiencies under the Japanese Sarbanes-Oxley Act of 2006. Given that the Japanese official agencies attempted to minimize the negative shock caused by the disclosure, we find no stock market reactions on the whole to the disclosure of internal control weaknesses. We also show that negative market reactions are intensified if firms have changed auditors in recent years, have uncertainties over their ability to continue as a going concern, have larger assets or fixed debts, or are listed on the emerging stock exchanges. In contrast, negative stock reactions are mitigated when firms have high ratios of foreign shareholders or current liabilities. Another interesting finding is that whether a firm engages a Big 4 audit firm does not seem to matter to investors evaluating firms with internal control weaknesses