A recent study by Mohan Fonseka, Omar Al Farooque, Xing Yang, and Wu Qilin, published in the International Journal of Auditing, examines the impact of internal control quality and mandatory internal control disclosure regulations on executive perks in Chinese firms. Spanning a dataset from 2008 to 2019, the research delves into how these factors influence both the over-consumption and under-consumption of executive perks, revealing a complex interaction that significantly affects corporate governance.
The study employs a robust methodological framework, utilizing fixed-effect regression analyses and quasi-natural experiments to test its hypotheses. It finds that high-quality internal controls are associated with a balanced consumption of executive perks. Specifically, better internal controls mitigate both excessive and insufficient perks, suggesting a mechanism through which firms can optimize executive incentives. This optimization ensures that perks serve their intended purpose of motivation without leading to excesses that might harm the firm’s financial health.
Furthermore, the research highlights the critical role of China’s internal control regulation system, commonly referred to as C-SOX. This regulatory framework has been shown to enhance the relationship between internal control quality and executive perk consumption, ensuring that firms adhere to a more disciplined approach. The mandatory disclosure regulations under C-SOX have significantly curbed both the under- and over-consumption of perks, promoting a more transparent and accountable corporate environment.
The implications of these findings are profound for policymakers, managers, and investors. For policymakers, the study underscores the importance of stringent internal control and disclosure regulations in fostering good corporate governance. Managers can glean insights into the benefits of implementing high-quality internal controls to achieve a balanced incentive structure, while investors can better assess the governance quality of firms based on their internal control systems and disclosure practices.
Overall, this study provides a comprehensive analysis of how internal control quality and mandatory disclosure regulations interact to shape executive perk consumption. By ensuring optimal levels of perks, these mechanisms help mitigate agency problems and enhance firm performance, contributing to a more sustainable corporate governance model.
For those interested in exploring the detailed findings and broader implications of this research, the full study is available here.