Abstract

Prior research has paid very little attention, if at all, to the risks and costs entailed in IT disintegration processes. In this study, we begin addressing this gap by studying how IT disintegration challenges posed by corporate divestitures affect the regulatory compliance risks and costs of divesting firms in the context of the Sarbanes-Oxley Act of 2002 (SOX). We hypothesize that firms with higher corporate divestiture intensities are more likely to have material weaknesses in their IT controls, more likely to become incompliant with SOX, and more likely to incur higher auditor fees during SOX audits. We also hypothesize that superior IT capabilities could reduce the probability and magnitude of the regulatory compliance risks and costs during divestitures. We find empirical support for these hypotheses in a sample of 252 publicly traded U.S firms that were audited independently for SOX compliance between 2004 and 2008.

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