Reporting of Internal Control Weaknesses and Debt Rating Changes‪.‬

Abstract This article examines the effect of corporate reporting of internal control weaknesses on debt rating changes. Bond rating agencies utilize (among other factors) financial statement information to assess a firm's liquidity and long term solvency as important inputs in determining corporate debt rating. Reporting of internal control weaknesses increases the reliability and transparency risk of the financial statement information, which may lead rating agencies to revise corporate default risk. Our results indicate that reporting of internal control weaknesses is significantly associated with debt ratings after controlling for other firm specific factors. Specifically, these findings suggest that reporting of internal control weaknesses can result in downgrades of the firm's outstanding debt. Keywords Debt rating changes * Internal control weaknesses