The primary objective of the current study is to empirically reexamine the relation between material weaknesses in internal control (MW) and cost of equity (CE). We direct particular emphasis to the way non-remediation, as well as remediation, of MW affects a firm's CE. This study utilizes a dataset that contains a large sample of second-year MW non-remediation cases, as well as third-, fourth-, and fifth-year non-remediation cases. The findings provide evidence that reporting MW, absent any remediation, in multiple consecutive years has a significant negative impact on CE. However, the current study also shows that the market views favorably a reduction in the number of MW (i.e., partial remediation). Our study helps to reconcile conflicting results in the literature devoted to the relation between MW and CE.

JEL Classifications: M41; M42.

Data Availability: Available from sources identified within the article.

Keywords:
internal control, monitoring, remediation, material weaknesses, cost of equity
2012
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