{"title":"Generalist CEOs, management risk and internal control weaknesses","authors":"Xiaolu Xu","doi":"10.1111/jbfa.12691","DOIUrl":null,"url":null,"abstract":"<p>This study examines the relationship between CEOs’ general ability and the quality of internal control over financial reporting (ICFR). Using a sample of S&P 1500 firms in the United States from 2004 to 2015, I find that firms with generalist (specialist) CEOs are more (less) likely to report internal control weaknesses under Section 404 of Sarbanes-Oxley Act of 2002 (ICW404). The positive relationship between generalist CEOs and ICW404 is weaker when the management risk is lower (longer CEO tenure). These results are robust to alternative models and approaches to address potential endogeneity issues. Additional analyses suggest that this positive relationship is attributed to generalist CEOs’ excessive risk taking. Furthermore, CEO type is related to company-wide ICW404, ICW404 due to staffing, complexity and general issues, rather than account-specific ICW404 or ICW404 due to revenue recognition issues. Drawing from the Upper Echelons Theory, this study contributes to the research on ICFR quality by documenting CEO type as an additional determinant of ICW404. It highlights the importance of investors, auditors and regulators considering the CEO's career experience and operating style when assessing a firm's internal control environment. It also adds to the literature on general managerial ability by documenting the cost of hiring generalist CEOs regarding ICFR quality.</p>","PeriodicalId":48106,"journal":{"name":"Journal of Business Finance & Accounting","volume":"51 1-2","pages":"209-239"},"PeriodicalIF":2.2000,"publicationDate":"2023-02-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Journal of Business Finance & Accounting","FirstCategoryId":"91","ListUrlMain":"https://onlinelibrary.wiley.com/doi/10.1111/jbfa.12691","RegionNum":3,"RegionCategory":"管理学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q2","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
引用次数: 0
Abstract
This study examines the relationship between CEOs’ general ability and the quality of internal control over financial reporting (ICFR). Using a sample of S&P 1500 firms in the United States from 2004 to 2015, I find that firms with generalist (specialist) CEOs are more (less) likely to report internal control weaknesses under Section 404 of Sarbanes-Oxley Act of 2002 (ICW404). The positive relationship between generalist CEOs and ICW404 is weaker when the management risk is lower (longer CEO tenure). These results are robust to alternative models and approaches to address potential endogeneity issues. Additional analyses suggest that this positive relationship is attributed to generalist CEOs’ excessive risk taking. Furthermore, CEO type is related to company-wide ICW404, ICW404 due to staffing, complexity and general issues, rather than account-specific ICW404 or ICW404 due to revenue recognition issues. Drawing from the Upper Echelons Theory, this study contributes to the research on ICFR quality by documenting CEO type as an additional determinant of ICW404. It highlights the importance of investors, auditors and regulators considering the CEO's career experience and operating style when assessing a firm's internal control environment. It also adds to the literature on general managerial ability by documenting the cost of hiring generalist CEOs regarding ICFR quality.
期刊介绍：
Journal of Business Finance and Accounting exists to publish high quality research papers in accounting, corporate finance, corporate governance and their interfaces. The interfaces are relevant in many areas such as financial reporting and communication, valuation, financial performance measurement and managerial reward and control structures. A feature of JBFA is that it recognises that informational problems are pervasive in financial markets and business organisations, and that accounting plays an important role in resolving such problems. JBFA welcomes both theoretical and empirical contributions. Nonetheless, theoretical papers should yield novel testable implications, and empirical papers should be theoretically well-motivated. The Editors view accounting and finance as being closely related to economics and, as a consequence, papers submitted will often have theoretical motivations that are grounded in economics. JBFA, however, also seeks papers that complement economics-based theorising with theoretical developments originating in other social science disciplines or traditions. While many papers in JBFA use econometric or related empirical methods, the Editors also welcome contributions that use other empirical research methods. Although the scope of JBFA is broad, it is not a suitable outlet for highly abstract mathematical papers, or empirical papers with inadequate theoretical motivation. Also, papers that study asset pricing, or the operations of financial markets, should have direct implications for one or more of preparers, regulators, users of financial statements, and corporate financial decision makers, or at least should have implications for the development of future research relevant to such users.
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