International Journal of Accounting Research

Abstract

The Effect of Internal Control Material Weaknesses on Future Stock Price Crash Risk: Evidence from Tehran Stock Exchange (TSE)

Seyed Mohammad Reza Razavi Araghi, Zahra Lashgari

Internal controls are methods put in place by a company to ensure the integrity of financial and accounting information, meet operational and profitability targets, and transmit management policies throughout the organization. Since 2012, attention to internal control in Iran became more serious; indicating its importance in entity’s activities. Given that investors tend to be concerned about returns and stock price crashes, the results of this study can be helpful for users of financial statements. Regarding the objective, this is an applied research using a correlational method. This study investigates the effect of internal control deficiencies on future stock price crash risk. A sample of 133 companies listed on Tehran Stock Exchange in the period 2011-2015 was selected and analyzed using a systematic elimination method. Logistic regression model was used for hypothesis testing. The research findings suggested that material weaknesses in internal control have positive and significant impacts on future stock price crash risk.