The effect of internal control environment on the value relevance of earnings

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This study examines whether a suitable control environment increases the value relevance of earnings by providing greater assurance on the reliability of financial reporting. Specifically, the level of suitable control environment is assessed by considering the quantity and quality of IC personnel, which are closely related to the personnel integrity/ethical values, competence, and authority/responsibility. Using a sample of 1,834 firm-year observations of Korean listed companies covering 2005–2010, the author finds that earnings are more value relevant when the increase in the average work experience of IC personnel is greater. However, no evidence is found that the value relevance of earnings is positively associated with the increase in the proportion of IC personnel. The findings suggest that a suitable control environment, established by deployment of qualified IC personnel with more work experience, improves the IC effectiveness and, thus, provides greater assurance on the reliability of financial reporting to market investors.

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    • Table 1. Sample selection procedure
    • Table 2. Descriptive statistics of variables
    • Table 3. Correlations of variables
    • Table 4. Analysis on the value relevance of earnings for subgroups
    • Table 5. Analysis on the Effect of IC Environment on the Value Relevance of Earnings
    • Table 6. Analysis on the effect of IC environment on the value relevance of earnings after controlling for the effect of the quantity and quality of IC personnel on each other
    • Table 7. Additional Analysis on the Effect of IC Environment on the Value Relevance of Earnings using Modified Variables