Study On The Influence Of Internal Control Quality To Investment Efficiency Under Life Cycle Perspective

Investment decision is one of the most important decisions in the company’sfinancial decision-making. From the microcosmic point of view, effective investment isthe main factor in the company’s growth and the foundation of future cash flow growth,it is also an important guarantee to increase corporate value. From the macro point ofview, investment is the driving force for China’s economic growth, higher investmentefficiency is an effective way to promote economic growth. Therefore, the study ofinvestment behavior of listed companies is closely related to the company’s owndevelopment.Meanwhile, since the promulgation of the U.S “Sarbanes-Oxley Act” on July25,2002, internal control supervision in other countries is gradually warming. The Ministryof Finance and China’s five ministries respectively promulgate the “Basic Standards ofInternal Control” and “Internal Control Guidelines” on May22,2008and April26,2010.From the point of view of internal control objectives, enterprises should improve theiroperational efficiency and effectiveness through a series of institutional arrangement andreasonable control.In addition, the enterprise life cycle theory considers that in different stages of lifecycle, enterprises have different organizational and development characteristics, so theywill face different agency problems and information asymmetry, and this is bound toaffect the efficiency of investment. So at different stages of life cycle, what are themotivations of inefficient investment? Does it have different influence of internal controlto investment efficiency? Can internal control quality paly a governance role to thesemotivations? In the five elements of internal control, which element has the most obviousrole to investment efficiency?In this view, the paper uses the method of theoretical analysis and empirical analysis,analyzes the impact of internal control to investment efficiency at different stage of lifecycle based on the data of Shanghai and Shenzhen listed companies from2009to2012.The paper analyzes along the clues of “Question—Theory—Empirical Analysis—Conclusions”, uses the theory of capital investment theory, property rights theory, agency theory and asymmetric information theory to explain the motivation of inefficientinvestment and governance role of internal control to inefficient investment; uses lifecycle theory to explain differences of efficient investment motivation under theperspective of life cycle, and the similarities and differences of internal control toinefficient investment, in order to enrich and develop the study of economicconsequences of internal control and influencing factors of investment efficiency. In theempirical analysis, the paper uses correlation analysis, the mean difference analysismethods to do preliminary examination, uses mixed-sectional regression model toempirically test hypotheses. The paper also do robustness test by grouping regrssion,changing samples and variable. Finally, the paper provides services listed companies howto balance costs and benefits, and reasonably allocate resources, it also providesreasonable suggestions to regulatory authorities to promote the construction ofcompany’s internal control system.The paper is divided to seven chapters:Chapter1, introduction. This chapter introduces the research background,theoretical significance and practical significance, research thinking and methods as wellas the technical route.Chapter2, references. This chapter deeply sorts out home and abroad importantdocuments from three main aspects as economic consequences of internal controls,factors of inefficient investment and life cycle theory, summarizes and concludes themain contribution of the existing literature, and determines the research direction.Chapter3, related theory analysis. This chapter mainly analyzes the mechanism ofinternal control on investment efficiency at different stages from the aspect of capitalinvestment theory, agency theory, asymmetric information theory and corporate life cycletheory, it is also the foundation for empirical analysis.Chapter4, design of empirical research. This chapter puts forward hypothesis on theproblem of impact of internal control quality to inefficient investmet, and the relationshipunder different life cycle, selects and screens the data of2009-2012Shanghai andShenzhen A share data, selects the variables of life cycle, internal control quality,inefficient investment and other variables, and constructs mixed-sectional regressionmodel, in order to get foundation for later empirical analysis. Chapter5, empirical test anaysis and conclusion. This chapter gets the followingconclusions:(1) sample companies have inefficient investment behavior at differentstages of business development;(2) for over-investment samples, internal control hassignificant inhabitation on over-investment in state-owned enterprises at the growingstage, the impact of internal control on over-investment is not significant in non-state-owned enterprises at the growing stage, the function is significant at both maturityand declining stage; for under-investment samples, the effect of internal control onunder-investment is not significant at growing and declining stage, at the mature stage,improving internal control quality can significantly relieve under-investment;(3) thischapter further analyzes the sample of which internal control can affect the investmentefficiency, to find the factors of inefficient investment and whether internal control hasthe role of governance on these factors, the results show that over-investment of thestate-owned enterprises at the growing stage is mainly due by manager agent behavior,over-investment of state-owned and non-state-owned enterprises at the maturity stage isalso caused by manager agent behavior, over-investment of state-owned at the recessionstage is mainly caused by major shareholders’ encroachment, over-investment ofnon-state-owned enterprises at the recession stage is by manager agent behavior andmajor shareholders’ encroachment, internal control can play a governance role onover-investment caused by two types of agency cost; under-investment of state-ownedenterprises at the maturity stage is caused by manager agent behavior and financingconstraints, under-investment of non-state-owned enterprises at the maturity is caused bymajor shareholders’ encroachment and financing constraints, internal control can play agovernance role on over-investment caused by agency cost and higher internal controlalso can ease financing constraints.Chapter6, robustness test. This chapter do robustness test from two the aspects,changing samples and changing variables, the conclusion is still robust. In addition, thischapter also conducts a further analysis, selects the samples which internal control cansignificantly affect investment efficiency, analyses the influence of internal controlelements on non-efficient investment, in order to provide ideas of improving internalcontrol for enterprises. The conclusions are:(1) control environment, control activitiesand information and communication have siginificant effect on inefficienct investment in state-owned enterprises of growing stage;(2) risk invaluation, control activities andinternal supervision have siginificant effect on inefficienct investment in state-ownedenterprises of maturity stage; control activities, information and communication andinternal supervision have siginificant effect on inefficienct investment innon-state-owned enterprises of maturity stage;(3) information and communication andinternal supervision have siginificant effect on inefficienct investment in state-ownedenterprises of recession stage; risk invaluation and control activities have siginificanteffect on inefficienct investment in non-state-owned enterprises of recession stage.Chapter7, conclusions and policy recommendations. This chapter does theconclusion based on the theoretical research and empirical results, then gives therecommendations to improve the investment efficiency from the perspective of theinternal control, on one hand provides suggestions for companies to improve investmentefficiency, on the other hand provides a new angle to enhance internal control quality oflisted companies; finally, the paper summarizes the contributions and shortage of thisstudy, furthers the direction of future research.The innovation of this paper is:(1) the paper uses the theory of life cycle to explainthe motivation of inefficient investment and the impact of internal control to inefficientinvestment, enrich and develop the study of economic consequences of internal controland the factors of investment efficiency;(2) on the research perspective, explore theinfluence of internal control on investment efficiency from a dynamic view. Most studiesin the past stay in a static level, but in different stages of business development, theextent of agent cost and asymmetry is significantly different, it’s more realistic to studythe influence of internal control on investment efficiency form a dynamic perspective;(3)on the research line, the paper discusses the internal and external factors of inefficientinvestment, analyzes the influence path of internal control to inefficient investment basedon those motivations, and tests the governance role of internal control to internal andexternal factors, thus differs from previous studies directly discussed the economicconsequences of internal control; besides, the paper discusses the impact of internalcontrol elements quality to investment efficiency at different stages, and can helpcompanies to improve internal control quality and investment efficiency, which is theimportant application of this article. There are still some deficiencies in this paper:(1) the paper does not distinguishindustry when discussing the key problem, which can effect the research depth;(2)elements of internal control measurement is still not accurate enough. The further studyis:(1) from the perspective of behavioral finance such as manager emotion and the natureto discuss the motivation of inefficient investment, in order to test the governance role ofinternal control quality to these motivation;(2) use the economic concept of “inputs andoutputs” to measure the investment efficiency of the enterprises, which will further thefuture study.