Can non‐executive equity incentives reduce internal control ineffectiveness? Evidence from China

Abstract

AbstractUsing data from Chinese listed firms for the period 2012–2018, we provide new evidence that the intensity of non‐executive equity incentives can reduce the likelihood of internal control weaknesses and improve internal control effectiveness. We also find that internal control weaknesses are more likely to be remedied in firms that implement strong non‐executive equity incentive polices. Besides, we document novel results that employee equity incentives for non‐executives can optimise the internal environment, improve the internal supervision system, and thereby reduce the operational‐level weaknesses of a company’s internal controls.