Female CEO and internal control weaknesses

Abstract

This study examines how the gender of CEOs affects internal controls over financial reporting. According to the upper echelon theory, managers’ demographics can determine the choices of strategies. Prior literature documents the characteristics of CEOs relevant to internal controls, such as the CEO’s age, entrenchment (Lin, Wang, Chiou, & Huang, 2014), and experience (Oradi, Asiaei, & Rezaee, 2020); however, the impact of the CEO’s gender on internal controls has not been explored. We hypothesize that female CEOs are negatively associated with internal control weaknesses because they are reported to act more conservatively and ethically than male CEOs. We use logit and Poisson regression models to test the association between the CEO’s gender and internal control weaknesses of U.S. public companies from 2004 to 2020. Our results show that female CEOs are less likely to report an internal control weakness both in the current year and in the future years. We follow You (2021) and use a two-stage model to address the potential endogeneity concerns and show that our findings are not biased. Our study documents an important factor that influences internal controls, and we provide evidence of the benefits of female CEOs on the quality of financial reports