Family entrenchment and internal control: evidence from S&P 1500 firms
Xia Chen1 & Mei Feng2 & Chan Li3
# Springer Science+Business Media, LLC, part of Springer Nature 2020
RAS

Abstract
\We examine whether family owners exploit internal control weaknesses for entrenchment
purposes and whether the public disclosure requirement under SOX 404 helps
alleviate this entrenchment. We find supportive evidence for both questions. In the
initial years of SOX 404 implementation (2004 and 2005), ineffective internal control
in family CEO firms is more conducive to entrenchment – measured by the occurrence
of misstatements, frauds, and related party transactions – than ineffective internal
control in nonfamily firms is. With the public disclosure requirement of SOX 404 in
place, family CEO firms are more likely to remediate internal control weaknesses, and
the resulting improvement in internal control in family CEO firms has significantly
reduced family entrenchment. Our findings provide new evidence on the dynamics of
family entrenchment in the U.S. and shed light on a key benefit of public disclosure of
internal control quality.