The Impact of Internal Control Weaknesses on Firms’ Cash Policies
International Journal of Accounting, Auditing, and Performance Evaluation, 12(4), 396-421
36 Pages Posted: 15 Jun 2013 Last revised: 23 Sep 2016
Date Written: June 23, 2015
We study the association between firms’ Section 302 and Section 404 internal control weaknesses and these firms’ cash-to-cash flows sensitivities. We also examine whether the presence of the internal control weaknesses affects the relationship between firms’ asset liquidity and stock liquidity. We find that the presence of Section 404 internal control weaknesses is associated with stronger cash-to-cash flows sensitivities and with weaker impact of higher asset liquidity on stock liquidity. Our results suggest that internal control weaknesses increase firms’ reliance on internal, as opposed to external, financing. Also, internal control weaknesses increase uncertainty over future uses of cash, thereby reducing the positive impact of higher relative cash balances on stock liquidity. Thus, our study provides additional evidence on the potential costs of internal control weaknesses.
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