Equity Incentives and Internal Control Weaknesses

48 Pages Posted: 16 Dec 2012

See all articles by Steven Balsam

Steven Balsam

Temple University - Department of Accounting

Wei Jiang

California State University, Fullerton

Bo Lu

Ohio State University (OSU)

Date Written: November 15, 2012

Abstract

In this study, we examine whether the monetary incentives associated with equity ownership (broadly defined to include stock and stock options) induce managers to maintain strong internal controls. Supporting the notion that equity ownership provides management incentive to strengthen the company's internal controls we find that the likelihood of a material weakness in internal control decreases with increases in equity incentives. This result holds for both traditional regression analysis, as well as analysis conducted using propensity score matching. Further analysis suggests that these results are more closely related to company-level internal control problems, are more strongly associated with incentives provided by restricted equity, and are more highly correlated with CFO than CEO incentives.

Keywords: Equity Compensation, Internal Control Weaknesses, SOX 404

JEL Classification: M41, M42, M48

Suggested Citation

Balsam, Steven and Jiang, Wei and Lu, Bo, Equity Incentives and Internal Control Weaknesses (November 15, 2012). Contemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2189907

Steven Balsam (Contact Author)

Temple University - Department of Accounting ( email )

306 Speakman Hall
Philadelphia, PA 19122
United States
215-204-5574 (Phone)
215-204-5587 (Fax)

HOME PAGE: http://www.sbm.temple.edu/~drb/

Wei Jiang

California State University, Fullerton

800 N State College St
Fullerton, CA 92831
United States

Bo Lu

Ohio State University (OSU) ( email )

Blankenship Hall-2010
901 Woody Hayes Drive
Columbus, OH OH 43210
United States

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