Zabihollah Rezaee - The University of Memphis, Professor of Accountancy
Reza Espahbodi - Professor of Accounting, Indiana University South Bend
Pouran Espahbodi - Professors of Accountancy, Western Illinois University
Hassan Espahbodi - Professors of Accountancy, Western Illinois University

This study examines the stock price reaction to the internal control reporting as required under Section 404 of the Sarbanes-Oxley Act of 2002 for threedistinct groups of firms. After controlling for the general stock price movements, we find that stock returns are mos t negative for firms that delay filing of theirinternal control reports, continue to be negative for firms with ineffective internal controls, and are positive for firms with effective internal controls. The decreasein stock prices of the first two groups is more pronounced for thos e with a lower return on assets, higher growth rate in sales, and no prior disclosure of theirinternal controls weaknesses. Our results indicate that market participants value the reliability of financial information resulted from Section 404 compliance irrespective of firm size and debt proportion, cons istent with the SEC recent release of Section 404 compliance for smaller public companies

Capital market; Security price reaction; Corporate governance; Internal control