Institutional ownership and internal control material weakness

In this paper we examine the relationship between the composition of a firm's institutional ownership and the existence of internal control material weaknesses (ICMWs) under SOX Sections 302 and 404. We find a significantly positive relationship between the level of total institutional ownership and ICMW existence. The positive relationship is mainly driven by the transient investors who, with short-term investment horizons, may have little incentive to engage in costly and effective monitoring. When partitioning ICMWs into pervasive (more severe) and contained (less severe) types, we find that firms with pervasive ICMWs are associated with a lower (higher) level of dedicated (transient) institutional ownership. We also find that firms with pervasive ICMWs have significantly fewer resources to invest in internal control systems than do firms with contained ICMWs.
Introduction In this study we investigate the association between a firm's institutional ownership and the existence of internal control material weakness (ICMW hereafter) under Sections 302 and 404 of the [...]