Internal Information Flows and Hiring Decisions: Evidence from Internal Control Disclosures

Prior studies claim that well-functioning internal control facilitates internal information flows and hence contributes to operational efficiency via efficient resource allocation. In this paper we examine whether and to what extent internal control effectiveness is associated with efficiency regarding corporate employment. Consistent with disruption of internal information flows associated with internal control weaknesses (ICW), we find that employment in ICW firms tends to deviate more from the predicted level based on firm characteristics than that of non-ICW firms. We interpret the results as supporting lower employment efficiency for ICW firms than for non- ICW firms. Relatedly, we report that subsequent remedial actions in ICW firms improve employment efficiency afterwards. Moreover, we provide a set of evidence suggestive of internal information quality associated with ICW mediating the relation. In sum, we shed light on the related literature by discussing how internal information quality translates into employment efficiency.