Restoring Trust after Internal Control Weaknesses: Does Corporate Governance Matter?

This study explores the role of corporate governance for firms with internal control weaknesses (hereafter ICW firms). We use a sample identified effective and ineffective internal control by their auditors. First, we find that ICW firms have lower analyst following and stock value. We also find that ICW firms with more internal governance improvement tend to remedy their control problems in successive year: Moreover, the internal governance improvement offers the remediation firms positive economic benefits, such as greater analyst following and higher stock value. Therefore, our results provide evidence that despite of ineffective internal control system, corporate governance improvement, i.e. board and audit committee structure and monitoring mechanism, can help ICW firms to remedy their internal control problems more quickly and furthermore restore trusts from analysts and investors in the capital market.