Disclosure on Internal Control Systems as Substitute of Alternative Governance Mechanisms

40 Pages Posted: 15 Dec 2008 Last revised: 11 Feb 2009

See all articles by Giovanna Michelon

Giovanna Michelon

University of Bristol

Sergio E. Beretta

Bocconi University - Department of Accounting; SDA Bocconi

Saverio Bozzolan

Luiss Guido Carli University - Department of Business and Management

Date Written: February 2009

Abstract

The study addresses the issue of disclosure on internal control system (ICS) recommended by best practices in corporate governance in the light of the agency theory perspective. We posit that reporting on the characteristics of internal control systems is an alternative governance mechanism that management provide to investors when the other devices are not in place.

Analyzing the disclosure on internal control systems of 160 European firms listed in four different stock exchanges (London, Paris, Frankfurt and Milan) over a three-year period (2003 - 2005), we find empirical evidence that ICS disclosure is a substitute for the monitoring role played by the ownership structure, institutional ownership, the proportion of independent directors sitting on the board and the proportion of accounting expert members of the audit committee.

This study provides empirical support for Williamson's (1983) substitute hypothesis among different governance mechanisms and it offers insights to firms and practitioners on the relevance of disclosure on internal control systems as a monitoring mechanism for investors.

Keywords: Corporate governance, Monitoring package, Internal control systems, Disclosure, Ownership structure, Board of directors, Audit committee

JEL Classification: G18, G32, K22

Suggested Citation

Michelon, Giovanna and Beretta, Sergio E. and Bozzolan, Saverio, Disclosure on Internal Control Systems as Substitute of Alternative Governance Mechanisms (February 2009). Available at SSRN: https://ssrn.com/abstract=1316323 or http://dx.doi.org/10.2139/ssrn.1316323

Giovanna Michelon (Contact Author)

University of Bristol ( email )

University of Bristol,
Senate House, Tyndall Avenue
Bristol, BS8 ITH
United Kingdom
BS8 1PQ (Fax)

Sergio E. Beretta

Bocconi University - Department of Accounting ( email )

Via Roentgen 1
Milan, 20136
Italy

SDA Bocconi ( email )

Via Bocconi 8
Milan, Milan 20136
Italy

Saverio Bozzolan

Luiss Guido Carli University - Department of Business and Management ( email )

Via Salvini, 3
Rome, 00198
Italy

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