Investor Reactions to Internal Control Disclosures Under Enhanced External Audits: Evidence from Korea
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Purpose: This study examines changes in investor reactions to internal control disclosures in Korea following the introduction of internal control audits, focusing on differences between KOSPI- and KOSDAQ-listed firms. Design/methodology/approach: Internal control audits were introduced in phases based on asset size from 2019. This study analyzed 13,091 firm-year observations from Korean stock markets using Generalized Least Squares (GLS) and designated 2014-2018 as the 'pre-audit period' and 2019-2021 as the 'post-audit period.' Findings: Cumulative abnormal returns (CARs) for internal control improvements significantly increased after the introduction of audits, with stronger effects observed in KOSDAQ-listed firms. Research limitations/implications: Internal control audits enhance disclosure credibility, aligning with signaling theory by signaling improved governance and financial accuracy. They also support agency theory by reducing information asymmetry and limiting management discretion. Originality/value: This study highlights the early benefits of internal control audits in Korea, emphasizing their role in boosting market confidence.
Abstract
Purpose: This study examines changes in investor reactions to internal control disclosures in Korea following the introduction of internal control audits, focusing on differences between KOSPI- and KOSDAQ-listed firms. Design/methodology/approach: Internal control audits were introduced in phases based on asset size from 2019. This study analyzed 13,091 firm-year observations from Korean stock markets using Generalized Least Squares (GLS) and designated 2014-2018 as the 'pre-audit period' and 2019-2021 as the 'post-audit period.' Findings: Cumulative abnormal returns (CARs) for internal control improvements significantly increased after the introduction of audits, with stronger effects observed in KOSDAQ-listed firms. Research limitations/implications: Internal control audits enhance disclosure credibility, aligning with signaling theory by signaling improved governance and financial accuracy. They also support agency theory by reducing information asymmetry and limiting management discretion. Originality/value: This study highlights the early benefits of internal control audits in Korea, emphasizing their role in boosting market confidence.