Faultlines among Senior Executives, Internal Control and Corporate Disclosure

60 Pages Posted: 27 Feb 2021

See all articles by Xiaotao Kelvin Liu

Xiaotao Kelvin Liu

Northeastern University - Accounting Group

Mathijs Van Peteghem

Maastricht University - Department of Accounting and Information Management

Date Written: July 1, 2019

Abstract

We investigate whether faultlines among senior executives are associated with internal control effectiveness and corporate disclosure outcomes. Faultlines are hypothetical dividing lines splitting a group into subgroups based on the simultaneous alignment or overlap of members’ demographic characteristics (e.g., Lau and Murnighan 2005). Faultlines among senior executives create conflicts, impede information sharing and divert managerial attention from common-goal task to handling conflicts. Therefore, we hypothesize that faultlines among senior executives compromise internal control effectiveness and corporate disclosure quality. Following organizational and social psychology literature, we construct faultline measures based on executive characteristics such as age, gender, educational background, tenure, and expertise. Consistent with our hypotheses, we find that faultlines among senior executives are positively associated with material internal control weaknesses, and negatively with its remediation. We further find that faultlines among senior executives are positively associated with 10-k filing delay, financial restatements, and management forecast errors, which also support our hypotheses. Implications for theory and practice are discussed.

Keywords: Demographic faultlines; internal control; corporate disclosure; senior executives

Suggested Citation

Liu, Xiaotao Kelvin and Van Peteghem, Mathijs, Faultlines among Senior Executives, Internal Control and Corporate Disclosure (July 1, 2019). Available at SSRN: https://ssrn.com/abstract=3758138 or http://dx.doi.org/10.2139/ssrn.3758138

Xiaotao Kelvin Liu (Contact Author)

Northeastern University - Accounting Group ( email )

404B Hayden Hall
360 Huntington Avenue
Boston, MA 02115
United States
617-373-5926 (Phone)

Mathijs Van Peteghem

Maastricht University - Department of Accounting and Information Management ( email )

Netherlands

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