CEO Equity Incentives and the Remediation of Material Weaknesses in Internal Control

32 Pages Posted: 5 Nov 2017

See all articles by Xuejiao Liu

Xuejiao Liu

University of International Business and Economics

Xiaohong Liu

The University of Hong Kong

Date Written: October/November 2017

Abstract

This study examines how CEO equity incentives affect the remediation of material weaknesses (MWs) in internal control disclosed pursuant to the Sarbanes‐Oxley Act (SOX). We find that the sensitivity of CEO equity portfolios to stock price (CEO price sensitivity, or delta) has a positive impact on firm promptness in remedying MWs, whereas the sensitivity of CEO equity portfolios to stock return volatility (CEO volatility sensitivity, or vega) has a negative impact on firm promptness in remedying MWs. In addition, we provide evidence that effective boards of directors mitigate the undesirable, negative effect of CEO volatility sensitivity on remediation of MWs. Our results shed light on the effects of equity compensation structures on internal control quality in the more transparent, post‐SOX environment.

Keywords: CEO equity incentives, internal control weakness, remediation, Sarbanes‐Oxley Act

Suggested Citation

Liu, Xuejiao and Liu, Xiaohong, CEO Equity Incentives and the Remediation of Material Weaknesses in Internal Control (October/November 2017). Journal of Business Finance & Accounting, Vol. 44, Issue 9-10, pp. 1338-1369, 2017, Available at SSRN: https://ssrn.com/abstract=3064365 or http://dx.doi.org/10.1111/jbfa.12265

Xuejiao Liu (Contact Author)

University of International Business and Economics ( email )

Beijing, Beijing
China

Xiaohong Liu

The University of Hong Kong ( email )

School of Business
The University of Hong Kong
Hong Kong

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