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

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  • Wanfu Li
  • Yuling Han
  • Jiangang He

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.

Suggested Citation

  • Wanfu Li & Yuling Han & Jiangang He, 2019. "How Does the Heterogeneity of Internal Control Weakness Affect R&D Investment?," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 55(15), pages 3591-3614, December.
    • Handle: RePEc:mes:emfitr:v:55:y:2019:i:15:p:3591-3614
    DOI: 10.1080/1540496X.2019.1620729
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    Cited by:

    1. Li, Zhe & Wang, Bo & Wu, Tianlong & Zhou, Dan, 2021. "The influence of qualified foreign institutional investors on internal control quality: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 78(C).

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