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JANUARY 2007
FOCUS ON RESEARCH is a continuation of the 2002 print series through which we are sharing the business related issues being researched by our faculty. Annually they participate in a variety of communications avenues ranging from expert editorial support in various media to lecturing and consulting. As a Carnegie Doctoral/Research-Extensive University, publishing research in referred academic journals is a critical part of our mission. A Dean’s Seminar also has been established where the faculty has an opportunity to do additional research and share it monthly with colleagues. Items from all of these sources may be included in this website’s contributions and stories, as they become available. |
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Presented at Dean’s Seminar, January 19, 2007
Non-Professional Investors’ Forward-Looking Assessments of Investment Risk:
Effects of Control Weakness Pervasiveness and Disclosure Detail* |
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CAROLYN STRAND NORMAN, associate professor, Department of Accounting, Virginia Commonwealth University
ANNA M. ROSE, Southern Illinois University Carondale
JACOB M. ROSE, Southern Illinois University Carbondale |
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ABSTRACT: The specific objectives of this research are to examine whether non-professional investors adjust their assessments of investment risk in response to control weakness disclosures, the pervasiveness of control weaknesses, and the detail of explanation provided regarding the pervasiveness of control weaknesses. Based upon the findings from an experiment with 109 non-professional investors (MBA students with an average of five years of management experience), surveys of non-professional investors and Fortune 500 directors, and interviews with leading control weakness disclosure experts, our results suggest that non-professional investors adjust their investment risk assessments in response to material weakness disclosures. More specifically, our results indicate that forward-looking assessments of investment risk are higher for firms with material control weakness disclosures, relative to firms without such disclosures. We also find evidence for an interactive effect of control weakness pervasiveness and disclosure detail that is counter to the expected benefits of expanded disclosure desired by corporate directors. When material weakness disclosures in the Management Report on Internal Control include specific and detailed discussion of the pervasiveness of the control weaknesses, investors increase their assessments of investment risk for less pervasive weaknesses and decrease their assessments of risk for more pervasive weaknesses. Further, the interactive effects of control weakness pervasiveness and disclosure detail on risk assessments persist after remediation of the control weaknesses. Supplemental analyses suggest that non-professional investors believe that management is attempting to conceal the truth when detailed explanations are provided for non-pervasive control weaknesses, but believe that management is more trustworthy when management provides detailed explanations of pervasive control weaknesses. Trust in management mediates the relationship between perceived investment risk and the pervasiveness and explanation level of disclosed control weaknesses.
Key words: Internal control; control pervasiveness; control weakness; disclosure detail; investment risk
For profile of Dr. Norman-Strand link to
http://www.pubinfo.vcu.edu/busweb/2002/directory_details.asp?UserID=75 |
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Presented at Dean’s Seminar, February 2, 2007
“Information Technology Investments: Identifying Success Factors”* |
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H. ROLAND WEISTROFFER, associate professor,
Department of Information Systems,
Virginia Commonwealth University |
ABSTRACT: Though a substantial portion of corporate budgets is dedicated to information technology (IT), companies often do not experience the expected tangible benefits from these investments. This “productivity paradox” of IT has been widely discussed in the literature, the focus now mainly being on identifying the conditions under which investments are most likely to result in tangible benefits. According to the efficient market theory, stock prices fully reflect all available information; thus, when new, unexpected investment information is released, the stock prices adjust accordingly. If the implication of the released information is perceived as adding business value to the shareholders, the stock prices are expected to increase. We look at event studies that investigated conditions under which IT investments result in positive stock price reaction, including one study of our own. We also propose using automated knowledge acquisition techniques to derive a more comprehensive understanding of the factors that contribute to positive investors’ reactions.
For profile of Dr. Weistroffer link to http://www.pubinfo.vcu.edu/busweb/2002/directory_details.asp?UserID=83 |
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An asterisk,*, indicates research supported by a Summer Research Grant of the VCU School of Business. |
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