M&A Buyers Pay a Premium for Their Weak Financial Controls

The Sarbanes-Oxley Act (SOX) was enacted by the U.S. Congress in 2002 in the aftermath of a series of corporate scandals. It aims to strengthen investor protection by promoting better corporate governance and auditor independence. In particular, Sections 302 and 404 require top management to assess and certify the effectiveness of internal controls over financial reporting and an external auditor to attest to the validity of management’s assessment. Firms that cannot do so must disclose the existence and nature of their internal control weaknesses (ICWs). While a number of academic studies have documented associations between ICWs and suboptimal corporate behaviors … Read more