How Does the Heterogeneity of Internal Control Weakness Affect R&D Investment?

Wanfu Li, Yuling Han and Jiangang He

Emerging Markets Finance and Trade, 2019, vol. 55, issue 15, 3591-3614

Abstract: Internal control of nonfinancial reporting has received attention in the Committee of Sponsoring Organizations of the Treadway Commission’s new Internal Control-Integrated Framework. This paper explores the effect of internal control weakness (ICW) in financial reporting and nonfinancial reporting on R&D investment. Our results show that ICWs in financial and nonfinancial reporting inhibits R&D investment, and this effect comes mainly from ICWs in nonfinancial reporting. The impact of ICW in nonfinancial reporting on R&D investment is more serious at technology-intensive companies than labor- or capital-intensive companies. The influence of heterogeneous ICW on investment in corporate innovation has time lag effect and takes at least two paths of impact: weakening of executive compensation incentives and internal cash flow oversight. These results suggest that the ICW in nonfinancial reporting play a more important role in the allocation of resources for technological innovation.

Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:mes:emfitr:v:55:y:2019:i:15:p:3591-3614

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DOI: 10.1080/1540496X.2019.1620729

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