Corporate Relocations, Social Capital Changes, and Internal Control Consequences

• In Event: Auditor Labor Markets I

Abstract

This study extends the growing literature examining the relation between firms’ employees and internal control effectiveness. Using a quasi-exogeneous shock of headquarters relocations, we examine how disruptions in employee base affect internal control effectiveness immediately following headquarters relocations. We posit that relocation leads to disruptions in the employee base which, if substantial, can cause a deterioration in internal control quality. We proxy for this disruption with the change in local social capital between the pre- and post-locations. Using a sample of over 900 relocations between 2004-2017, we document that firm relocations involving greater changes in social capital have higher likelihoods of internal control material weaknesses in the new location. Importantly, these internal control material weaknesses are employee-driven. Our results are robust to various model configurations, a falsification test, longer panels, and sample partitions.

Authors

• Yufan Dong, Temple University

• Jayanthi Krishnan, Temple University