Faultlines among Senior Executives, Internal Control and Corporate Disclosure

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.