Does Internal Control Affect Corporate Outsourcing? Evidence from Forward Purchase

We examine the effect of internal control on corporate outsourcing in terms of purchase through forward contracts. We find that firms with internal control weakness have less forward purchase. Further analysis shows that the accuracy of management sales forecasts works as the channel through which internal control weakness affects forward purchase. The effect of internal control weakness on forward purchase is more pronounced for firms with more uncertain information environment. We also find preliminary evidence that more forward purchase leads to lower inventory volatility and better operating performance. Overall, our study provides new insights into the effect of internal control on corporate outsourcing decisions.