The impact of internal control implementation on stock price crash risk considering the role of corporate governance

Subject Areas : Accounting & Accountability

Abdolrasoul Mostajeran ¹ , Mehdi Mirjalali ²

1 - Assistant Professor, Faculty member of the Faculty of Financial Sciences, Kharazmi University, Tehran, Iran
2 - Ph.D. Candidate in Accounting, Faculty of Economics and Accounting, South Tehran Branch, Islamic Azad University, Tehran, Iran

Received: 2025-01-25 Accepted : 2025-06-02 Published : 2025-06-03

Keywords: Corporate governance, COSO framework, internal control implementation, stock price crash risk,

Abstract :

Purpose: The aim of this research is to examine the impact of implementing internal control within the COSO framework on the risk of stock price crashes in the Iranian capital market. Additionally, to address existing inconsistencies, the moderating role of corporate governance is also investigated in this context.

Methodology: This research was conducted using an empirical-quantitative approach based on multivariate regression analysis. It is based on data collected from 153 companies listed on the Tehran Stock Exchange over an 8-year period from 2016 to 2023, and econometric techniques were employed to test the hypotheses.

Findings: The research findings indicate that the implementation and disclosure of internal controls within the COSO framework, which includes five criteria; control environment, risk assessment, control activities, information and communication, and monitoring, play a significant role in reducing stock price crash risk. Furthermore, in companies with strong corporate governance mechanisms, the negative impact of implementing internal controls on stock price crash risk is more pronounced compared to companies with weak corporate governance mechanisms.

Originality: The findings of this research provide new insights into the implications of implementing internal control and strong corporate governance, which can be used for planning and policymaking to improve the status of companies in the capital market.

References:

حمیدیان، محسن، و اسفندیاری، ابراهیم (1397). رابطه بین حاکمیت شرکتی و ضعف کنترل داخلی در شرکت‌های پذیرفته شده در بورس اوراق بهادار تهران. کنفرانس بین‌المللی مطالعات بین رشته‌ای در مدیریت و مهندسی. https://civilica.com/doc/883089
شمگانی، رضا، و اژدر، محسن (1403). بررسی نقش تعدیلی حاکمیت شرکتی بر رابطه بین مکانیسم‌های کنترل داخلی و عملکرد مالی. هفتمین کنفرانس بین‌المللی و هشتمین همایش ملی یافته‌های نوین در مدیریت، روانشناسی و حسابداری، 168-180. https://civilica.com/doc/2066369
فروغی، داریوش، و ساکیانی، امین (1395). تأثیر توانایی مدیریتی بر کارایی سرمایه‌گذاری. حسابداری و منافع اجتماعی، 6(3)، 97-126. doi: 10.22051/ijar.2016.2533
فندرسکی، علی، و صفری گرایلی، مهدی (1397). اثربخشی کنترل‌های داخلی و ریسک سقوط قیمت سهام. پژوهش‌های حسابداری مالی و حسابرسی،‌10(38)، 169-186. dor: 20.1001.1.23830379.1397.10.38.8.0
کلانتر، فاطمه، معین‌الدین، محمود، و ابطحی، سید یحیی (1401). بررسی نقش تعدیلی حاکمیت شرکتی در ارتباط بین اهرم مالی و رشد شرکت‌ها با استفاده از رهیافت رگرسیون سوئیچینگ. نشریه علمی سیاست‌گذاری اقتصادی، 14(28)، 285-33. 22034/10/epj.19608/2023.2395 doi:
Akmal, M., Rashid, A., & Amin, S. (2023). Corporate governance and information asymmetry. Forman Journal of Economic Studies, 18(2), 45-69. doi: 10.32368/FJES.20221808
Arping, S., & Sautner, Z. (2013). Did SOX section 404 make firms less opaque? Evidence from cross-listed firms. Contemporary Accounting Research, 30(3), 1133–1165. doi: 10.1111/j.1911-3846.2012.01188.x
Ashbaugh-Skaife, H., Collins, D. W., Kinney, W. R., & Lafond, R. (2009). The effect of SOX internal control deficiencies on firm risk and cost of equity. Journal of Accounting Research, 47(1), 1–43. doi: 10.1111/j.1475-679X.2008.00315.x
Benmelegh, E., Kandel, E., & Veronesi, P. (2010). Stock-based compensation and CEO (dis) incentives. Quarterly Journal of Economics, 125, 1769–1820. www.jstor.org/stable/40961018
Bhagat, S., & Bolton, B. (2008). Corporate governance and firm performance. Journal of Corporate Finance, 14, 257-273. doi: 10.1016/j.jcorpfin.2008.03.006
Cao, T., Nguyen, H., Nguyen, K., & Nguyen, L. (2023). Information asymmetry on the link between corporate social responsibility and stock price crash risk. Cogent Economics & Finance, 11(2), 2230727. doi: 10.1080/23322039.2023.2230727
Chen, J., Chan, K. C., Dong, W., & Zhang, F. D. (2017). Internal control and stock price crash risk: Evidence from China. European Accounting Review, 26(1), 125–152. doi: 10.1080/09638180.2015.1117008
Chen, S. Y., Li, Z. Z., Han, B. B., & Ma, H. Y. (2021). Managerial ability, internal control and investment efficiency. Journal of Behavioral and Experimental Finance, 31, 100523. doi:1016/10/j.jbef.100523/2021.
Dang, V., & Nguyen, Q. K. (2024). Internal corporate governance and stock price crash risk: Evidence from Vietnam. Journal of Sustainable Finance & Investment, 14(1), 24-41. doi: 10.1080/20430795.2021.2006128
Denis, D., & McConnell, J. J. (2003). International corporate governance. Journal of Financial and Quantitative Analysis, 38, 1-36. doi: 10.2307/4126762
Elshandidy, T., & Shrives, P. J. (2016). Environmental incentives for and usefulness of textual risk reporting: Evidence from Germany. Journal of International Accounting, 51(4), 464–486. doi: 10.1016/j.intacc.2016.10.001
Fendereski, A., & Safari Gerayli, M. (2018). The effectiveness of internal controls and stock price crash risk. The Financial Accounting and Auditing Researches, 10(38), 169-186. dor: 20.1001.1.23830379.1397.10.38.8.0 [In Persian]
Foroghi, D., & Sakiani, A. (2016). The effect of managerial ability on investment efficiency. Journal of Accounting and Social Interests, 6(3), 97-126. doi: 10.22051/ijar.2016.2533
Gong, Y. F., Xia, Y. C., Xia, X. H., & Wang, Y. (2021). Management earnings forecasts bias, internal control, and stock price crash risk: new evidence from China. Emerging Markets Finance and Trade, 6, 1–13. doi: 10.1080/1540496X.2021.1931113
Gujarati, D.N. & Porter, D.C. (2009). Basic Econometrics. 5th Edition, McGraw Hill Inc., New York.
Guo, J., Huang, P., Zhang, Y., & Zhou, N. (2016). The effect of employee treatment policies on internal control weaknesses and financial restatements. The Accounting Review, 91(4), 1167–1194. doi: 10.2308/accr-51269
Gupta, P. P., Sami, H., & Zhou, H. Y. (2018). Do companies with effective internal controls over financial reporting benefit from Sarbanes-Oxley sections 302 and 404? Journal of Accounting, Auditing & Finance, 33(2), 200–227. doi: 10.1177/0148558X16663091
Hamidian, Mohsen; Esfandiari, Ebrahim. (2018). The relationship between corporate governance and internal control weaknesses in companies listed on the Tehran Stock Exchange. International Conference on Interdisciplinary Studies in Management and Engineering. https://civilica.com/doc/883089 [In Persian]
Healy, P. M., & Wahlen, J. M. (1999). A review of the earnings management literature and its implications for standard setting. Accounting Horizons, 13(4), 365–383. doi: 10.2308/acch.1999.13.4.365
Hutton, A. P., Marcus, A. J., & Tehranian, H. (2009). Opaque financial reports, R², and crash risk. Journal of Financial Economics, 94(1), 67–86. doi: 10.1016/j.jfineco.2008.10.003
Ismail, M. D., Kathim, A. M., & Al-Kanani, M. M. (2023). Corporate governance and its impact on the efficiency of internal control on non-profit government institutions: An exploratory study. International Journal of Professional Business Review, 8(1), 1–21. 10.26668/businessreview/2023.v8i1.1155
Jeon, K. (2019). Corporate governance and stock price crash risk. Academy of Accounting and Financial Studies Journal, 23(4), 1-13. www.abacademies.org/articles/Corporate-Governance-And-Stock-Price-Crash-Risk-1528-2635-23-4-433.pdf
Jiayao, Z., Sadiq, M., & Ling, T. W. (2023). The impact of corporate governance on the internal control objectives: evidence from China’s listed financial companies. Cuadernos de Economia, 46(131), 84-92. doi: 10.32826/cude.v2i131.1109
Jin, L., & Myers, S. C. (2006). R² around the world: new theory and new tests? Journal of Financial Economics, 79(2), 257–292. doi: 10.1016/j.jfineco.2004.11.003
Kalantar, F., Moeinaddin, M. & Abtahi, S. Y. (2023). Analyzing the moderating effects of corporate governance and profitability on the relationship between financial leverage and growth using a switching regression model. The Journal of Economic Policy, 14(28), 285-313. doi: 10.22034/epj.2023.19608.2395 [In Persian]
Kennedy, P. (1985). A guide to econometrics, second edition. Cambridge: The MIT Press.
Kim, J. B., Li, Y. H., & Zhang, L. D. (2011). CFOs versus CEOs: Equity incentives and crashes. Journal of Financial Economics, 101(3), 713–730. doi: 10.1016/j.jfineco.2011.03.013
Kim, J. B., Yeung, I., & Zhou, J. (2019). Stock price crash risk and internal control weakness: Presence vs. disclosure effect. Accounting & Finance, 59(2), 1197–1233. 10.1111/acfi.12273
Kothari, S. P., Shu, S., & Wysocki, P. D. (2009). Do managers withhold bad news? Journal of Accounting Research, 47(1), 241–276. doi: 10.1111/j.1475-679X.2008.00318.x
Li, W. Y. (2022). Disclosure of internal control material weaknesses and optimism in analyst earnings forecasts. International Journal of Accounting Information Systems, 44, 100545. doi: 10.1016/j.accinf.2021.100545
Lobo, G., Wang, C., Yu, X. O., & Zhao, Y. P. (2020). Material weakness in internal controls and stock price crash risk. Journal of Accounting, Auditing & Finance, 35(1), 106–138. doi: 10.1177/0148558X17696761
Masulis, R. W., & Mobbs, S. (2011). Are all inside directors the same? Evidence from the external directorship market. The Journal of Finance, 66(3), 823–872. doi: 10.1111/j.15406261.2011.01653.x
McNulty, J. E., & Akhigbe, A. (2016). What do a bank’s legal expenses reveal about its internal controls and operational risk? Journal of Financial Stability, 30, 181–191. doi: 10.1016/j.jfs.2016.10.001
Rasheed, M. S., Kouser, S., & Ling, Z. (2024). Corporate governance and stock price crash risk: Insights from an Emerging Market. Asia-Pacific Financial Markets, 1-19. doi: 10.1007/s10690-024-09467-6
San, Z., Wang, S., Xiu, Z., Zhou, L., & Zhou, Z. (2025). Political control, corporate governance and stock-price crash risk: evidence from China. Emerging Markets Review, 65, 101260. doi: 10.1016/j.ememar.2025.101260
Shamgani, R., & Azhdar, M. (1403). Investigating the moderating role of corporate governance on the relationship between internal control mechanisms and financial performance. 7th International Conference and 8th National Conference on New Findings in Management, Psychology and Accounting, 168-180. https://civilica.com/doc/2066369 [In Persian]
Shleifer, A., & Vishny, R. W. (1986). Large shareholders and corporate control. Journal of Political Economy, 94(3), 448–461. doi: 10.1086/261385
Singer, Z., & You, H. (2011). The effect of section 404 of the Sarbanes-Oxley Act on earnings quality. Journal of Accounting, Auditing & Finance, 26(3), 556–589. doi: 10.1177/0148558X11401554
Tarkovska, V. (2014). Corporate governance and stock price crash risk: evidence from UK panel data. Technological University Dublin. doi: 10.21427/D7FF5M
Tsai, Y. C., & Huang, H. W. (2021). Internal control material weakness opinions and the market’s reaction to securities fraud litigation announcements. Financial Research Letters, 41, 101833. doi: 10.1016/j.frl.2020.101833
Xie, B., Davidson III, W. N., & DaDalt, P. J. (2003). Earnings management and corporate governance: The role of the board and the audit committee. Journal of Corporate Finance, 9(3), 295–316. doi: 10.1016/S0929-1199(02)00006-8
Xue, C. Y., & Ying, Y. (2022). Financial quality, internal control and stock price crash risk. Asia-Pacific Journal of Accounting & Economics, 29(6), 1671–1691. doi: 10.1080/16081625.2020.1754254