Internal Control Quality and Sensitivity between Corporate Capital Investment and Investment Opportunity: Empirical Research Based on Chinese Listed Companies' Data

Abstract

Abstract:

Internal control has become a focus of regulators, practitioners and researchers. Thus, what the economic consequence will have of corporate internal control? This paper investigates the effect of internal control quality on corporate capital investment using the internal control index developed by a research team from Xiamen University as our proxy for internal control quality. We find that the better the quality of internal control, the higher of sensitivity between capital investment and investment opportunity. Further studies show that the effect of internal control on corporate sensitivity between capital investment and investment opportunity is more severe in state-owned companies and regions where factor market is developed. The results have important theoretical and practical significance.

Key words: institutional environment, internal control quality, capital investment, sensitivity between capital investment and investment opportunity

Zhou Zhongsheng, Xu Hongri, Chen Hanwen, Chen Jun. Internal Control Quality and Sensitivity between Corporate Capital Investment and Investment Opportunity: Empirical Research Based on Chinese Listed Companies' Data[J]. , 2016, 28(9): 206-217.

References

[1] 方军雄.市场化进程和资本配置效率的改善[J].经济研究, 2006,(5):50-61
[2] 魏明海,柳建华.国企分红、治理因素与过度投资[J].管理世界, 2007,(4):88-95
[3] 辛清泉,林斌,王彦超.政府控制、经理薪酬与资本投资[J].经济研究, 2007,(8):110-122
[4] 靳庆鲁,孔祥,侯青川.货币政策、民营企业投资效率与公司期权价值[J].经济研究, 2012,(5):96-106
[5] Hammersley J. S., Myers L. A., Shakespeare C. Market Reactions to the Disclosure of Internal Control Weaknesses and to the Characteristics of Those Weaknesses under Section 302 of the Sarbanes Oxley Act of 2002[J].Review of Accounting Studies, 2007,13(1):141-165
[6] Benish M. D., Billings M., Hodder L. Internal Control Weaknesses and Information Uncertainty[J].The Accounting Review, 2008,83(3):665-703
[7] Rose J. M., Norman C. S., Rose A. M. Perceptions of Investment Risk Associated with Material Control Weakness Pervasiveness and Disclosure Detail[J].Accounting Review, 2010,85(5):1787-1807
[8] Doyle J., Ge W., McVay S. Accruals Quality and Internal Control over Financial Reporting[J].The Accounting Review, 2007,82(5):1141-1170
[9] Lu H., Richardson G., Salterio S. Direct and Indirect Effects of Internal Control Weaknesses on Accrual Quality: Evidence from.Unique Canadian Regulatory Setting [J].Contemporary Accounting Research, 2011,28(2):675-707
[10] Beng W. G., Dan L. Internal Controls and Conditional Conservatism[J].Accounting Review, 2011,86(3):975-1005
[11] Ettredge M., Li C., Sun L. The Impact of SOX Section 404 Internal Control Quality Assessment on Audit Delay in the SOX Era[J].Auditing:.Journal of Practice.Theory, 2006,25(2):1-23
[12] Raghunandan K., Rama D. V. SOX Section 404 Material Weakness Disclosures and Audit Fees[J].Auditing:.Journal of Practice.Theory, 2006,25(1):99-114
[13] Hoitash R., Hoitash U., Bedard J. C. Internal Control Quality and Audit Pricing under the Sarbanes-Oxley Act[J].Auditing:.Journal of Practice.Theory, 2008,27(1):105-126
[14] Elder R., Zhang Y., Zhou J., Zhou N. Internal Control Weaknesses and Client Risk Management[J].Journal of Accounting Auditing and Finance, 2009,24(4):543-579
[15] Masli A., Peters G.F., Richardson V. J., et al. Examining the Potential Benefits of Internal Control Monitoring Technology[J].The Accounting Review, 2010,85(3):1001-1034
[16] Kinney J. W. R., Shepardson M. L. Do Control Effectiveness Disclosures Require SOX 404(b) Internal Control Audits?.Natural Experiment with Small U.S. Public Companies [J].Journal of Accounting Research, 2011,49(2):413-448
[17] Krishnan J., Krishnan J., Song H. The Effect of Auditing Standard No.5 on Audit Fees [J].Auditing:.Journal of Practice and Theory, 2011,30(4):1-27
[18] Bedard J. C., Graham L. Detection and Severity Classifications of Sarbanes-Oxley Section 404 Internal Control Deficiencies[J].Accounting Review, 2011,86(3):825-855
[19] Kim J. B., Song B. Y., Zhang L. Internal Control Weakness and Bank Loan Contracting: Evidence from SOX Section 404 Disclosures[R].Working Paper, Concordia University, 2009a
[20] Costello A. M., Wittenberg-Moerman R. The Impact of Financial Reporting Quality on Debt Contracting: Evidence from Internal Control Weakness Reports[J].Journal of Accounting Research, 2011,49(1):97-136
[21] Ghosh A., Lubberink M. Timeliness and Mandated Disclosure on Internal Controls under Section 404[R].Working Paper, City University of New York, 2006
[22] Hoitash U., Hoitash R., Johnstone K.M. Internal Control Material Weaknesses, CFO Compensation, and the Moderating Effects of Corporate Governance, External Monitoring, and Firm Risk[R].Working Paper, Northeastern University, 2009
[23] Wang X. Increased Disclosure Requirements and Corporate Governance Decisions: Evidence from Chief Financial Officers in the Pre- Post -Sarbanes-Oxley Periods[J].Journal of Accounting Research, 2010,48(4):885-920
[24] Kim J. B., Song B. Y., Zhang L. Internal Control Quality and Analyst Forecast Behavior: Evidence from SOX Section 404 Disclosure[R].Working Paper, City University of Hong Kong, 2009b
[25] Doyle J., Ge W., McVay S. Determinants of Weaknesses in Internal Control over Financial Reporting[J].Journal of Accounting and Economics, 2007,44(1-2):193-223
[26] Cassar G., Gerakos J. Determinants of Hedge Fund Internal Controls and Fees[J].Accounting Review, 2010,85(6):1887-1919
[27] Petrovits C., Shakespeare C., Shih A. The Causes and Consequences of Internal Control Problems in Nonprofit Organizations[J].Accounting Review, 2011,86(1):325-357
[28] Krishnan J. Audit Committee Quality and Internal Control: An Empirical Analysis[J].The Accounting Review, 2005,80(2):649-675
[29] Zhang Y., Zhou J., Zhou N. Audit Committee Quality, Auditor Independence, and Internal Control Weaknesses[J].Journal of Accounting and Public Policy, 2007,26(3):300-327
[30] Naiker V., Sharma D. S. Former Audit Partners on the Audit Committee and Internal Control Deficiencies[J].The Accounting Review, 2009,84(2):559-587
[31] Johnstone K., Li C., Rupley K. H. Changes in Corporate Governance Associated with the Revelation of Internal Control Material Weaknesses and Their Subsequent Remediation[J].Contemporary Accounting Research, 2011,28(1):331-383
[32] Li C., Sun L., Ettredge M. Financial Executive Qualifications, Financial Executive Turnover and Adverse SOX 404 Opinions[J].Journal of Accounting and Economics, 2010,50(1):93-110
[33] Lin S., Bardhan IR. The Role of the Internal Audit Function in the Disclosure of Material Weaknesses[J].Accounting Review, 2010,86(1):287-323
[34] 刘启亮,罗乐,何威风,等. 产权性质、制度环境与内部控制[J].会计研究, 2012,(3):52-61
[35] 李万福,林斌,林东杰.内部控制能有效规避财务困境吗？[J].财经研究, 2012,(1):124-134
[36] 陈汉文,周中胜.内部控制质量与企业债务融资成本[J].南开管理评论, 2014,17(3):103-111
[37] 卢锐,柳建华,许宁.内部控制、产权与高管薪酬业绩敏感性[J].会计研究, 2011,(10):42-48
[38] 李万福,林斌,宋璐.内部控制在公司投资中的角色:效率促进还是抑制[J].管理世界, 2011,(2):81-99
[39] Aahbaugh-Skaife H., Collins D. W., Kinney W. R. The Effect of Internal Control Deficiencies and Their Remediation on Accrual Quality [J].The Accounting Review, 2008,83(1):217-250
[40] Ashbaugh-Skaife H., Collins D. W., Kinney W. R. The Effect of SOX Internal Control Deficiencies on Firm Risk and Cost of Equity [J].Journal of Accounting Research, 2009,47(1):1-43
[41] Jensen M. C. Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers[J].The American Economic Review, 1986,76(2):323-329
[42] Fazzari S. M., Hubbard G. Petersen B. C., Blinder A. S., Poterba, James M. Financing Constraints and Corporate Investment. National Bureau of Economic Research, Inc.,1987,33:657-657
[43] Costello A. M., Wittenberg-Moerman R. The Impact of Financial Reporting Quality on Debt Contracting: Evidence from Internal Control Weakness Reports[J].Journal of Accounting Research, 2011,49(1):97-136
[44] Kim J. B., Song B. Y., Zhang L. Internal Control Weakness and Bank Loan Contracting: Evidence from SOX Section 404 Disclosures[J].The Accounting Review, 2011,86(4):1157-1188
[45] Jensen M. C. The Modern Industrial Revolution, Exit and the Failure of Internal Control Systems[J].The Journal of Finance, 1993,48(3):831-880
[46] Johnson S., LaPorta R., Lope-De-Sliance F., et al. Tunnelling[J].The American Economic Review, 2000,90(2):22-27
[47] Brown K. E., Lim J. H. The Effect of Internal Control Deficiencies on the Usefulness of Earnings in Executive Compensation [J].Advances in Accounting, 2012,28(1):75-87
[48] Hoitash R., Hoitash U., Johnstone K. M. Internal Control Material Weaknesses and CFO Compensation [J].Contemporary Accounting Research, 2012,29(3):768-803
[49] 唐雪松,周晓苏,马如静.上市公司过度投资行为及其制约机制的实证研究[J].会计研究, 2007,(7):44-52
[50] 李茜,张建君.制度前因与高管特点:一个实证研究[J].管理世界, 2010,(10):110-121
[51] 唐雪松.政府干预、GDP增长与地方国企投资[J].金融研究, 2010,(8):33-48
[52] 李寿喜.代理成本和代理效率[J].经济研究, 2007,(1) :102-113
[53] 卢峰,姚洋.金融压抑下的法治、金融发展和经济增长[J].中国社会科学, 2004,(1):42-55
[54] Brandt L., Hongbin L. Bank Discrimination in Transition Economics: Ideology, Information, or Incentives[J].Journal of Comparative Economics, 2007,31(3):387-413
[55] Zhang J., Yu J. Intergovernmental Fiscal Reform, Financial Deepening and Regional Disparity in China:.Missing Link [J].Social Sciences in China, 2006(spring):143-159
[56] Cull R., Xu L. Institutions, Ownership, and Finance: the Determinants of Profit Reinvestment among Chinese Firms [J].Journal of Financial Economics, 2005,77(1):117-146
[57] 连玉君,程建.投资—现金流敏感性:融资约束还是代理成本[J].财经研究, 2007,(2):37-46
[58] 樊纲,王小鲁,朱恒鹏.中国市场化指数:各地区市场化相对进程2011年报告[M].北京:经济科学出版社, 2011
[59] 余明桂,潘红波.政治关系、制度环境与民营企业银行贷款[J].管理世界, 2008,(8):9-22
[60] Akdogu E., MacKay P. Investment and Competition [J].The Journal of Financial and Quantitative Analysis, 2008,43(2):299-330
[61] McLean R. D., Zhang T., Zhao M. Why Does the Law Matter? Investor Protection and its Effects on Investment, Finance, and Growth[J].Journal of Finance, 2012,67(1):313-350