Shareholder Value Implications of the Internal Audit Function

Date

2017-08

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Abstract

In 2013, NASDAQ Stock Market LLC (NASDAQ) issued a proposal to mandate the internal audit function (IAF) for all listed companies but later withdrew the proposal. In this study, I investigate whether a mandatory IAF adds shareholder value and how the value implications vary across companies. For companies that do not voluntarily adopt an IAF before the proposal, I document a positive (negative) price response to the NASDAQ IAF proposal filing (withdrawal). This evidence suggests that, on average, investors perceive a mandatory IAF as value enhancing. I also document that the market reactions are more positive for companies with more business segments or with lower institutional ownership. This evidence suggests that investors’ perception of the mandatory IAF are more positive for companies with complex business or with weak corporate governance. In addition, I document the types of companies that are more likely to establish an IAF voluntarily.

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Keywords

Auditing, Internal, Financial statements—Law and legislation, Stockholder wealth, Corporations—Investor relations

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Copyright ©2017 is held by the author. Digital access to this material is made possible by the Eugene McDermott Library. Further transmission, reproduction or presentation (such as public display or performance) of protected items is prohibited except with permission of the author.

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