The interrelation between capital markets and internal financial control: Analysis of regulatory frameworks, empirical evidence, and corporate failures

Abstract

Capital markets operate on the basis of trust, which is directly linked to the reliability and transparency of the financial and non-financial information disclosed by issuers. At the core of this reliability lies the system of internal control. Internal control represents a process carried out by an organization’s management and personnel, designed to provide reasonable assurance regarding the achievement of operational and strategic objectives. The effectiveness of internal control is a critical component of corporate governance, as it ensures the integrity of the financial data utilized by investors for decision-making. The primary objective of this study is to analyse and synthesise the empirical evidence demonstrating the quantitative impact of internal control quality on capital market valuation. This includes measuring the effects on the cost of equity, stock price volatility and the market risk premium (Ittonen 2010). The secondary objective is to identify the critical deficiencies within the main regulatory frameworks that have contributed to major corporate failures, and to assess the subsequent reforms introduced to restore investor confidence.