In this study, we analyze how a material internal control weakness affects investment efficiency. Prior Literature shows that managers could make inefficient investment decisions for information asymmetry between managers and investors.
In particular, when there is information asymmetry, managers can be tempted to enjoy the privilege and be motivated to extend their firms over an adequate scale. This can enhance the possibility of causing the firms' over investment. Furthermore the managers' short-sighted inclination can also influence inefficient decision for investment. On the other hand, some prior researches claimed that the firms with low-quality financial reports augmented information asymmetry, which generated inefficient investment.
Thus, a material internal control weakness debases accounting information quality, which can cause information asymmetry and increase inefficiency investment propensity. Moreover, unreliable internal information from weak internal control is likely to distort managers' decision making. In this regard, it was analyzed how internal control weakness affects investment efficiency.
The result of this study presents that the firms which disclose material internal control weakness exhibit inefficient investment behavior prior to the disclosure when they are financially unconstrained and inefficiency investment is mitigated after the disclosure.