SYNOPSIS
Section 404 of the Sarbanes-Oxley Act requires management of publicly traded companies to assess and disclose the effectiveness of their internal controls over financial reporting (ICFR). In our analysis of 200 actual ICFR reports disclosing material weaknesses in internal control, we observe that the most common communication style in our sample is, among other characteristics, a more defensive version of the “reasonable assurance” argument combined with the use of first-person pronouns. In an experiment where we vary management’s communication style with respect to material weakness disclosures, we find that nonprofessional investors are more willing to invest in a company when management uses a version of the “reasonable assurance” argument with fewer characteristics of defensive communication and does not use first-person pronouns. Our findings show a sharp contrast between the communication styles management chooses to use in actual ICFR reports and what we observe experimentally as the most effective communication style.
Data Availability: Data are available from the authors upon request.
JEL Classifications: M40; M41.
