Repairing Organizational Legitimacy Following Information Technology (IT) Material Weaknesses: Executive Turnover, IT Expertise, and IT System Upgrades

59 Pages Posted: 2 Feb 2016

See all articles by Jacob Haislip

Jacob Haislip

Texas Tech University

Adi Masli

University of Arkansas - Sam M. Walton College of Business

Vernon J. Richardson

University of Arkansas at Fayetteville

Juan Manuel Sanchez

University of Texas at San Antonio

Date Written: September 2015

Abstract

Since Information Technology (IT)-based internal controls are pivotal in providing access to, and security of, financial records, we argue that an IT-related material weakness (ITMW) is a significant threat to organizational legitimacy. Prior research suggests that firms work to repair legitimacy by disassociation with executives blamed for the deficiency and the establishment of a monitoring mechanism to ensure the problem is addressed (Suchman, 1995). As a test of disassociation, we find that relative to a propensity-score-matched sample of nonITMW firms, ITMW firms experience higher CEO, CFO, and director turnover. As a test of the establishment of a monitoring mechanism to repair organizational legitimacy, we find that ITMW firms hire CEOs, CFOs, and directors with higher levels of IT expertise, and make significant IT system upgrades. We find evidence that ITMW firms remediate deficiencies in a more timely fashion when they appoint a new CFO with IT expertise or upgrade their financial reporting system. Collectively, our results suggest that firms make significant monitoring changes to re-establish organizational legitimacy after receiving an ITMW.

Keywords: CEO, CFO, Director, turnover, internal control material weakness, corporate governance, information technology

JEL Classification: G30, J53, M4, M12, M41, O32, O33

Suggested Citation

Haislip, Jacob and Masli, Adi and Richardson, Vernon J. and Sanchez, Juan Manuel, Repairing Organizational Legitimacy Following Information Technology (IT) Material Weaknesses: Executive Turnover, IT Expertise, and IT System Upgrades (September 2015). Journal of Information Systems, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2726535

Jacob Haislip

Texas Tech University ( email )

P.O. Box 42101
Lubbock, TX 79409
United States

Adi Masli

University of Arkansas - Sam M. Walton College of Business ( email )

Fayetteville, AR 72701
United States

Vernon J. Richardson

University of Arkansas at Fayetteville ( email )

401 WCOB
Fayetteville, AR 72701
United States

Juan Manuel Sanchez (Contact Author)

University of Texas at San Antonio ( email )

One UTSA Circle
San Antonio, TX 78249
United States

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