SYNOPSIS
Beginning January 1, 2012, all publicly listed firms in China are required, under the Basic Standard of Enterprise Internal Control (China SOX), to provide an internal control report (ICR). Prior to that, many firms had elected to voluntarily comply with this regulation. We examine the change in internal control disclosure regimes and its impact on the properties of analyst earnings forecasts. We compare the quantity and severity of ICWs disclosed under voluntary versus mandatory regimes, and find evidence suggesting that the disclosure of more serious ICWs increases when ICW disclosures become mandatory. We then investigate the effect of ICW disclosures on analyst forecast error and dispersion. We find that measures of ICWs are negatively associated with desirable properties of analyst earnings forecasts. We also find a less positive association between ICW disclosures and forecast error and dispersion in the mandatory regime.
JEL Classifications: G34; G38; M41.