Internal control weakness and bank loan contracting: Evidence from SOX section 404 disclosures

Accounting Review

Volumn 86, Issue 4, 2011, Pages 1157-1188

  Kim, Jeong Bon ^a   Song, Byron Y ^b   Zhang, Liandong ^a  

^a UNIVERSITY OF HONG KONG   (Hong Kong)

^b Dept of Electrical and Computer Engineering   (Canada)

Author keywords

Internal control weaknesses; Loan contracting; Sarbanes Oxley Act (SOX)

Indexed keywords

EID: 80052516440     PISSN: 00014826     EISSN: None     Source Type: Journal    
DOI: 10.2308/accr-10036     Document Type: Article

References (52)

1. Altman, E. 1968. Financial ratios, discriminant analysis, and the prediction of corporate bankruptcy. Journal of Finance 23 (4): 589-609.
2. Ashbaugh-Skaife, H., D. W. Collins, and W. R. Kinney. 2007. The discovery and reporting of internal control deficiencies prior to SOX-mandated audits. Journal of Accounting and Economics 44 (1-2): 166-192.
3. Ashbaugh-Skaife, H., D. W. Collins, W. R. Kinney, and R. LaFond. 2008. The effect of SOX internal control deficiencies and their remediation on accrual quality. The Accounting Review 83 (1): 217-250.
4. Ashbaugh-Skaife, H., D. W. Collins, W. R. Kinney, and R. LaFond. 2009. The effect of SOX internal control deficiencies on firm risk and cost of equity. Journal of Accounting Research 47 (1): 1-34.
5. Ball, R., R. M. Bushman, and F. P. Vasvari. 2008. The debt-contracting value of accounting information and loan syndicate structure. Journal of Accounting Research 46 (2): 247-387.
6. Ball, R., and L. Shivakumar. 2006. The role of accruals in asymmetrically timely gain and loss recognition. Journal of Accounting Research 44 (2): 207-242. (Pubitemid 43937437)
7. Beneish, M. D., M. B. Billings, and L. D. Hodder. 2008. Internal control weakness and information uncertainty. The Accounting Review 83 (3): 665-703.
8. Berger, A. N., and G. F. Udell. 1990. Collateral, loan quality, and bank risk. Journal of Monetary Economics 25 (1): 21-42.
9. Bharath, S. T., S. Dahiya, A. Saunders, and A. Srinivasan. 2009. Lending relationships and loan contract terms. Review of Financial Studies (forthcoming).
10. Bharath, S. T., J. Sunder, and S. V. Sunder. 2008. Accounting quality and debt contracting. The Accounting Review 83 (1): 1-28.
11. Bradley, M., and M. R. Roberts. 2004. The structure and pricing of corporate debt covenants. Working paper, Duke University and the University of Pennsylvania.
12. Chava, S., and R. Jarrow. 2004. Bankruptcy prediction with industry effects. Review of Finance 8 (4): 537- 569.
13. Chava, S., D. Livdan, and A. Purnanandam. 2009. Do shareholder rights affect the cost of bank loans? Review of Financial Studies 22 (8): 2973-3004.
14. Cole, R. A. 1998. The importance of relationships to the availability of credit. Journal of Banking and Finance 22 (6-8): 959-977. (Pubitemid 128344727)
15. Costello, A. M., and R. Wittenberg-Moerman. 2011. The impact of financial reporting quality on debt contracting: Evidence from internal control weakness reports. Journal of Accounting Research 49 (1): 97-136.
16. Cox, D. R. 1972. Regression models and life-tables. Journal of the Royal Statistical Society, Series B (Methodological) 34 (2): 187-220.
17. Dechow, P., W. Ge, and C. Schrand. 2010. Understanding earnings quality: A review of the proxies, their determinants and their consequences. Journal of Accounting and Economics 50 (2-3): 344-401.
18. Dechow, P., R. G. Sloan, and A. P. Sweeney. 1995. Detecting earnings management. The Accounting Review 70 (2): 193-225.
19. Denis, D. J., and V. T. Mihov. 2003. The choice among bank debt, non-bank private debt, and public debt: Evidence from new corporate borrowings. Journal of Financial Economics 70 (1): 3-28. (Pubitemid 37170170)
20. Dennis, S., and D. J. Mullineaux. 2000. Syndicated loans. Journal of Financial Intermediation 9 (4): 404-426.
21. Dennis, S., D. Nandy, and I. G. Sharpe. 2000. The determinants of contract terms in bank revolving credit agreements. Journal of Financial and Quantitative Analysis 35 (1): 87-110.
22. Dhaliwal, D., C. Hogan, R. Trezevant, and M. Wilkins. 2011. Internal control disclosures, monitoring, and the cost of debt. The Accounting Review 86 (4): 1131-1156.
23. Doyle, J., W. Ge, and S. McVay. 2007a. Determinants of weaknesses in internal control over financial reporting. Journal of Accounting and Economics 44 (1-2): 193-223.
24. Doyle, J., W. Ge, and S. McVay. 2007b. Accruals quality and internal control over financial reporting. The Accounting Review 82 (5): 1141-1170.
25. Duffie, D., and D. Lando. 2001. Term structures of credit spreads with incomplete accounting information. Econometrica 69 (3): 633-664. (Pubitemid 32514245)
26. Easley, D., and M. O'Hara. 2004. Information and the cost of capital. Journal of Finance 59 (4): 1553-1583. (Pubitemid 39137801)
27. Feng, M., C. Li, and S. McVay. 2009. Internal control and management guidance. Journal of Accounting and Economics 48 (2-3): 190-209.
28. Fama, E. 1985. What's different about banks? Journal of Monetary Economics 15 (1): 29-39.
29. Francis, J., R. LaFond, P. Olsson, and K. Schipper. 2005. The market pricing of accruals quality. Journal of Accounting and Economics 39 (2): 295-327. (Pubitemid 40553758)
30. Gow, I. D., G. Ormazabal, and D. J. Taylor. 2010. Correcting for cross-sectional and time-series dependence in accounting research. The Accounting Review 85 (2): 483-512.
31. Graham, J. R., S. Li, and J. Qiu. 2008. Corporate misreporting and bank loan contracting. Journal of Financial Economics 89 (1): 44-61.
32. Hammersley, J. S., L. A. Myers, and C. Shakespeare. 2008. Market reactions to the disclosure of internal control weaknesses and to the characteristics of those weaknesses under Section 302 of the Sarbanes- Oxley Act of 2002. Review of Accounting Studies 13 (1): 141-165.
33. 2, and crash risk. Journal of Financial Economics 94 (1): 67-86.
34. Ivashina, V. 2009. Asymmetric information effects on loan spreads. Journal of Financial Economics 92 (2): 300-319.
35. Jimenez, G., V. Salas, and J. Saurina. 2006. Determinants of collateral. Journal of Financial Economics 81 (2): 255-281. (Pubitemid 44057760)
36. Kim, J-B., J. S. L. Tsui, and C. H. Yi. 2010. The voluntary adoption of international financial reporting standards and loan contracting around the world. Review of Accounting Studies (forthcoming).
37. Lambert, R., C. Leuz, and R. Verrecchia. 2007. Accounting information, disclosure, and cost of capital. Journal of Accounting Research 45 (2): 385-420.
38. Moody's Investors Service. 2004. First Year Section 404 Reports on Internal Control: Impact on Ratings Will Depend on Nature of Material Weaknesses Reported. New York, NY: Moody's Investors Service.
39. Moody's Investors Service. 2006. Second Year Section 404 Reports on Internal Control: Delinquent Filers are most at Risk of Negative Rating Action. New York, NY: Moody's Investors Service.
40. Moody's Investors Service. 2007. Third Year Section 404 Reports on Internal Control: Controls Problems are Decreasing, but Reporting can be Improved. New York, NY: Moody's Investors Service.
41. Ogneva, M., K. R. Subramanyam, and K. Raghunandan. 2007. Internal control weaknesses and cost of equity: Evidence from SOX Section 404 disclosures. The Accounting Review 82 (5): 1255-1297.
42. Ohlson, J. A. 1980. Financial ratios and the probabilistic prediction of bankruptcy. Journal of Accounting Research 18 (1): 109-131.
43. Petersen, M. A. 2009. Estimating standard errors in finance panel data sets: Comparison approach. Review of Financial Studies 22 (1): 435-480.
44. Public Company Accounting Oversight Board (PCAOB). 2007. An Audit of Internal Control over Financial Reporting that is Integrated with an Audit of Financial Statements. Auditing Standard No. 5. Washington, D.C.: PCAOB.
45. Rajan, R. G. 1992. Insiders and outsiders: The choice between informed and arm's-length debt. Journal of Finance 47 (4): 1367-1400.
46. Rajan, R. G., and A. Winston. 1995. Covenants and collateral as incentives to monitor. Journal of Finance 50(4): 1113-1146.
47. Shumway, T. 2001. Forecasting bankruptcy more accurately: A simple hazard model. Journal of Business 74 (1): 101-124.
48. Smith, C. W., and J. B. Warner. 1979. On financial contracting: An analysis of bond covenants. Journal of Financial Economics 1 (2): 117-161.
49. Strahan, P. E. 1999. Borrower risk and the price and nonprice terms of bank loans. Working paper, Federal Reserve Bank of New York.
50. Sufi, A. 2007. Information asymmetry and financing arrangements: Evidence from syndicated loans. Journal of Finance 62 (2): 629-668.
51. U. S. House of Representatives. 2005. The Impact of the Sarbanes-Oxley Act. Hearing before the Committee on Financial Services (April 21). Washington, D.C.: government Printing Office.
52. Vasvari, F. P. 2008. Equity compensation and the pricing of syndicated loans. Working paper, London Business School.