Internal Control Weakness And Financing Constraints Of Listed Companies

At the beginning of the 21 st century,the“digital obsession” that once appeared in the capital market,which means you can grasp the business operations of enterprises as long as you study the financial statements of enterprises.But it was broken by Enron's financial fraud cases.Since then,the capital market has realized that it is impossible to achieve effective supervision on the execution of the enterprise contract by merely relying on the reveal of financial reports and audit reports.At this time,the internal control which plays a monitoring and optimizing role in the internal operation and financial information production process of enterprises has attracted great attention of the capital market.The internal control information disclosed by listed companies is an important basis for investors to judge the effectiveness of the company's internal management,the reliability of earnings,the possibility of violations and the risk of investment.It is also an important reference for creditors and commercial credit partners to evaluate the company's operational risk,information risk and weakness probability.The Ministry of Finance and other ministries jointly issued The Basic Standards of Enterprise Internal Control and Its Supporting Guidelines in 2008 and 2010,which greatly promoted the improvement of the internal control evaluation and reporting system of listed companies.However,the process of implementation and evaluation of internal control is a “black box”.The internal control disclosure is a signal that the senior management of the company releases internal control quality to the investors.The investors can identify and react effectively by that signal.Reduce information asymmetry,reduce investment risks and alleviate financing constraints is an urgent problem to be solved.Therefore,in the context of the existing system,the study of internal control and financing constraints has important theoretical and practical significance for understanding the effectiveness of the implementation of the internal control system,protecting investors' interests and improving the efficiency of the capital market.Based on the internal control environment of China's capital market and listed companies,this paper manually collects the internal control data of listed companies from 2008 to 2016.Based on information asymmetry theory,principal-agent theory,signaling theory and effective market theory,this paper examines the bank credit market,stock market and commercial credit market from the perspective of financing constraints.This paper also examines the economic consequences of internal control weakness,disclosure and rectification of listed companies,then analyze from a dynamic perspective.It focused on the moderating effect of the change of internal control supervision intensity on the impact of internal control on financing constraints.This paper adopts the combination of normative research and empirical research,and carries out the research according to the logical thinking of "propose the problem-research basis-research background-theoretical analysis and empirical test”.First of all,this paper sorts out the actual existence and disclosure status of the internal control weakness of listed companies in 2008-2016.According to the statistics: with the gradual strengthening of the internal control supervision system,the number of disclosures and weakness of internal control evaluation reports and audit reports of listed companies is increasing year by year,the disclosure methods are gradually standardized.However,in the sample period,only 0.95% of listed companies are determined that internal control is invalid.The proportion of disclosure of invalid internal control is generally low.Based on previous research and in accordance with the “Guidelines for Internal Control Evaluation of Enterprises” and other standards,this paper comprehensively judges from the following aspects: financial restatement,the violations of company and executive,non-standard audit opinions on financial statements,negative opinions or disclosure of internal control auditing in non-financial reports.According to the judgment,we can know whether the enterprise has substantial internal control weakness and other weakness or not.Statistics show that 28% of companies with substantial weakness or above weakness,which is much higher than 3.25% of listed companies' disclosures and 2.22% of CPA disclosures.It shows that some companies didn't disclose real weakness in the internal control evaluation report and audit report,so the number of companies is too small,the internal control level and disclosure quality of listed companies are not good.This part seeks to form a preliminary and overall understanding of the existence and disclosure of the weakness in the internal control of listed companies at this stage.In the second place,this paper examines the impact of the existence of internal control weakness on financing constraints.According to the study,if the listed company has substantial internal control weakness,it will obviously increase the investor's perception of the risk.It means the company faces more serious financing constraints,specifically: the scale of debt financing is significantly lower,and the cost of debt financing is significantly higher,the cost of equity financing is significantly higher and business credit is significantly lower.It makes creditors,equity investors,commercial credit partners and other investors have stronger risk sensitivity when they face a company with substantial weakness,and propose more stringent financing conditions.The companies with substantial internal control weakness face more serious financing constraint.Furthermore,considering the impact of monetary policy on financing constraints,the actual existence of internal control weakness has significantly aggravated the financing constraints of companies during the tightening period.It shows that the high quality internal control level can alleviate corporate financing constraints during the tightening period and mitigate the adverse effects of monetary policy changes on companies financing.It should be pointed out that for companies with substantial internal control weakness but not disclosed,creditors,equity investors,and business partners and other investors may learn through other channels(such as field background investigation,news media,government supervision,analysts,etc.).In order to avoid and prevent investment risks,they will raise higher risk premiums and lower capital scale requirements.And it will make the companies face more serious financing constraints.At the same time,through the comparison of group samples,it is found that the behavior the companies with substantial internal control weakness but not disclosed does weaken the severity of financing constraints.It indicates that the opportunistic behavior of listed companies is deceptive.It enriches the literature on whether the internal control weakness were disclosed has an impact on financing constraints.Thirdly,this paper examines the impact of internal control weakness disclosure on financing constraints and the regulatory effect of regulatory intensity on the impact of internal control weakness disclosure on financing constraints.(1)The companies with the weakness of internal control will make creditors,equity investors and commercial credit partners have stronger risk sensitivity,which cause severe financing constraints.Furthermore,considering the impact of monetary policy on financing constraints,internal control weakness disclosure has significantly aggravated the financing constraints of companies during the tightening period.(2)The regulatory intensity has a positive impact between the weakness of internal control and financing constraints.After entering the stage of strong supervision,listed companies will disclose more information and expose more and more serious problems in internal control operations.For this reason,creditors increase debt financing costs,reduce debt financing scale,and commercial credit partners also reduce commercial credit,however,the costs of equity financing don't affected by that.Now the whole sample was divided into two stages: one is weak supervision and the other is strong supervision.With the increase of supervision intensity,the company's internal control environment has been significantly improved,the internal control risk has been reduced,and the supervision intensity has significantly weakened the negative impact of the internal control weakness disclosure on the debt financing scale and debt financing cost,it also lighten the constraints of debt financing.Up to a point,the change of supervision intensity can improve debt financing constraints to a certain extent.(3)In the group sample,there a heterogeneous impact for the companies with substantial internal control weakness and the disclosure,they were impacted the financing on different financing constraints.That is to say,compared with the companies that have internal control weakness but do not disclose,their commercial credit is lower.The supervision intensity has a positive impact to them on commercial credit financing.However,the impact on debt financing and equity financing is not obvious.The sample of substantive weakness is divided into two stages: weak supervision and strong supervision.In the weak supervision stage,for the companies with substantial internal control weakness and the disclosure,there are no significant impacts on the financing constraints of the three financing methods.When the companies enter the strong supervision stage,the strong supervision system makes enterprises disclose more internal control weakness,it has a negative impact on commercial debt financing,but the equity financing a debt financing has no significant impact.(4)Some listed companies with substantial internal control weakness and the disclosure imitate the others.under the pressure of legal pressure,uncertainty of the internal control system,the regulatory pressure of the capital market and the regulatory authorities,enterprises with internal control weakness may tend to comply with the minimum standards of imitation disclosure.For example,to classify major weakness as important or general weakness or to reduce the number of weakness disclosure.(5)Heterogeneity of internal control weakness has different effects on financing constraints of the three financing modes.financial reporting weakness have a greater negative impact on commercial credit,non-financial reporting weakness have greater negative impact on the scale of debt financing,while a company with the two types of weakness has the greatest negative impact on debt financing scale and cost.It shows that different types of investors have different risk sensitivity to weakness types.In the past,most people believe that the current internal control in China is mainly internal control of financial reports,the non-financial reporting target is relatively weak.This conclusion shows that non-financial internal control also has obvious economic consequences,and it supports that the internal control objective system is widely adopted in China not COSO.Finally,in this paper the effect of rectifying internal control weakness on financing constraints and the regulatory effect of regulatory strength on internal control weakness rectification are examined.It's found form the result that:(1)The rectification of internal control weakness can significantly reduce the risk perception of creditors and reduce the level of debt financing constraints,but it has no obvious effect on equity financing and commercial credit.Furthermore,considering the impact of monetary policy on financing constraints,the rectification of internal control weakness has significantly aggravated the financing constraints of companies during the tightening period.It shows that the high quality internal control level can alleviate corporate financing constraints during the tightening period and mitigate the adverse effects of monetary policy changes on companies financing.(2)Supervisory strength has a positive regulatory effect on the scale of debt financing influenced by the rectification of the internal control weakness,and has a negative regulatory weakness on the cost of debt financing influenced by the rectification of the internal control weakness,namely,the supervisory strength further enhances the reduction of internal control weakness rectification on debt financing constraints.However,the rectification of internal control weakness has no regulatory effect in affecting the cost of equity financing and commercial credit.It may be shown that the change of supervisory strength has an weakness on rectifying internal control weakness to improve the financing constraints in equity finance and commercial credit,but it is not obvious.After the whole samples are divided into "weak supervision stage" and "strong supervision stage",the rectification of the internal control weakness has no significant relation with the three financing methods in the weak supervision stage.But in the strong supervision stage,as the companies with the internal control information disclosed increase,the listed companies have taken measures to rectify weakness due to the exposure of weakness and the increase of external supervisory pressure.The improved quality of companies' internal control,the reduced perception of creditor risks and the change of regulatory strength have a significant control effect on the influence of rectifying the internal control weakness on debt financing,and the pressure of debt financing got relieved as a result.However,the improvement weakness of rectifying the internal control weakness on equity financing and commercial credit financing is not obvious.In this paper,Based on China's capital market and the internal control environment of listed companies,this paper examines the financial consequences of the existence,disclosure and rectification of the internal control weakness of listed companies from the perspective of financing constraints,and from the perspective of financing constraints.The perspective analyzes the adjustment effect of the change of supervision system on the financing constraints of internal control weakness.There are likely innovation points and contributions in this paper as follows:(1)From the perspective of "legality",this paper expands the research on the influence of supervision intensity on the disclosure motivation and disclosure behavior of internal control weakness.(2)From the perspective of substantial internal control weakness,this paper expands the research on the impact of internal control disclosure on financing constraints.(3)From the perspective of heterogeneity of the types of internal control defects,this paper deepens the research on the impact of internal control disclosure on financing constraints.(4)From the perspective of internal control defect rectification,this paper deepens the research on the impact of internal control disclosure on financing constraints.The results of this study are of great importance to investors,executives and regulators for reference:(1)It has provided empirical evidence for corporate executives to transformed the pressure of internal control regulation into internal motivation and to enhance the enthusiasm and initiative of improving the internal control system.(2)It has provided a decision-making basis for the regulatory agencies to improve the internal control evaluation system,to strengthen the penalties for violating the disclosure of internal control information,and improve the efficiency of supervision.(3)It helps investors identify the risks of the enterprises through internal control information,which is conducive to making the scientific decision.