Corporate diversification, institutional investors and internal control quality

This study investigates the relationship between corporate diversification, institutional investors and internal control quality. Using a sample of firms disclosing internal control information from 1999 to 2011, the results show that corporate diversification is positively associated with the likelihood of internal control weakness. Moreover, this relationship is stronger (weaker) when firms have higher transient (dedicated) institutional ownership, indicating that transient (dedicated) institutional investors increase (mitigates) the internal control problems arising from diversification. This study contributes to the literature by providing evidence on the role of corporate diversification in the quality of internal control.