CEO equity incentives and the remediation of material weaknesses in internal control |
| |
| Authors: | Xuejiao Liu Xiaohong Liu |
| |
| Affiliation: | 1. School of Business, University of International Business and Economics, Beijing, China;2. School of Business, The University of Hong Kong, Pokfulam, Hong Kong |
| |
| 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 |
|
|
