Institutional Ownership, Internal Control Material Weakness and Firm Performance

We examine whether a firm's composition of its institutional ownership affects its likelihood of disclosing material weaknesses in its internal control system under SOX 302 and 404 and, hence, its post-disclosure firm performance. The findings indicate that dedicated institutional investors reduce the likelihood of material weaknesses disclosures while transient institutional investors exacerbate the likelihood of material weaknesses disclosures. Firms identified with material weaknesses in internal control have worse operating performance and stock returns in the post-disclosure period than controlling firms, however, the particular types of institutional investors associated with internal control material weakness disclosures have no net impact on post-disclosure firms' performance.