Does the 2013 COSO internal control framework improve the information environment in the U.S. capital markets?

Purpose - SOX Section 404 requires that public companies evaluate and have their auditors attest to the effectiveness of their internal control over financial reporting (ICFR). These companies compare their ICFR effectiveness to the Internal Control Frameworks issued by Committee of the Sponsoring Organizations of the Treadway Commission (COSO). This paper aims to examine whether the implementation of the 2013 Control Framework has a positive impact on the information environment of U.S. public companies. Design/methodology/approach - The study sample comprises firms from the S&P 1500 index and the Russell 2000 index firms that filed their annual reports after December 15, 2014. This paper uses bid-ask spread as a primary measure of information asymmetry, while controlling for the simultaneous effects of the new COSO framework on trading volumes and price volatility. Findings - This paper finds a significant reduction in bid-ask spreads – a proxy for an improved information environment – among our sample firms following the adoption of the 2013 Control Framework, leading us to conclude that the 2013 Control Framework represents a substantial improvement. Research limitations/implications - This study specifically examines the impact of control frameworks on the information environment under SOX 404. Future research could explore other economic consequences associated with the adoption of the new COSO Framework. Additionally, it would be valuable to investigate whether the Cadbury model, which also qualifies as a “suitable” control framework under the SEC rules for ICFR assessments, produces similar or different outcomes. Future studies could also analyze the implementation details across all five components concerning the three types of objectives. Practical implications - The findings will provide valuable insights for policymakers on the effectiveness of the COSO 2013 Framework in enhancing internal control reporting. Social implications - The findings will also contribute to improving the information environment in the capital markets by guiding policymakers and regulators in assessing the effectiveness of the new COSO framework. Originality/value - While extensive research has focused on the consequences of accounting and related internal control disclosures, there has been limited examination of how the underlying internal control benchmarks affect the quality and reliability of ICFR assessments and disclosures. This research aims to address this gap.