External Governance Environment,Internal Control Quality And Debt Financing

Capital is the blood of an enterprise.If an enterprise’s financing channel is blocked and capital chain is broken,enterprise will get into financial distress,operation termination and bankruptcy liquidation.It is crucial for any enterprise to obtain timely and sufficient funding at the lower cost and improve financing efficiency,which is indispensable for an enterprise to keep on surviving and developing.Presently,main financing ways which are used by a lot of enterprises are debt and equity.According to statistical result issued by the National Bureau of Statistics,compared to equity financing,total scale of enterprise loan financing takes up more than 50%of the total social financing scale every year.Bank loan has some characteristics such as high speed,simple procedures,which are often used by most enterprises.As money lenders,bank depends on public financial information disclosed by company and examines enterprise’s profit ability,debt paying ability and risk level in order to reduce the risk of bank loan.However,due to the inherent limitation of financial information and earnings management,or even a subjective intentional whitewash and camouflage,decision relevance of financial information decreases for commercial bank credit decision,which means relying on financial information to make the credit decision,has not adapted to today’s credit demand yet.In 2004,"Due Diligence Guidance of Commercial Bank Credit" clearly emphasizes that bank credit decision should pay attention to financial information and non-financial information of enterprise.After analyzing these non-financial information risk warning,this thesis finds that these risk warning are almost the same as five elements of internal control,especially having a high concordance on description of risk concerns,which shows design and implementation effect of internal control has already been put more and more attention in our countries’commercial bank practice.In 2001,with the outbreak of accounting fraud case in Enron and WorldCom,the SOX Act was enacted,asking all listed company must disclose internal control information to enhance company managers’ responsibility of the enterprise internal control.In 2008,China’s Ministry of Finance and relevant departments jointly issued "Basic Norms of Enterprise Internal Control",which requires Chinese listed company to disclose gradually internal control information and realize finally mandatory disclosure of internal control information.the purposes of the regulation are to require listed company managers to strengthen internal management,and promote efficiency of internal control,and improve company’s financial information quality,and enhance information transparency to reduce information asymmetry between external investors(including creditors)and enterprise,which will reduce agency cost and be helpful to protect interests of enterprise stakeholders at last.Internal control is a kind of effective internal governance mechanism,whose effectiveness will be influenced by the external governance environment.So,governance effect of internal control must be combined with external governance environment factors.Based on institutional background of commercial credit risk assessment in China and supervision requirements on implementation of internal control system,using the principal-agent theory,signal transmission theory,asymmetric information theory,and corporate governance theory,this thesis focuses on studying how internal control quality influences on corporate debt financing.Based on in-depth analysis of governance functions of every external governance mechanism,taking into account reality of external governance practice in our country,this thesis chooses degree of marketization,product market competition and external audit supervision as indicators to stand for external governance environment from macro,medium and micro views.Using the publicly available data of listed companies from 2008 to 2015,this thesis carries out some empirical tests on how internal control governance,which is affected by the external governance environment,influences bank’s loan financing.This thesis mainly adopts these research methods,such as literature review,theoretical analysis and empirical test.Research conclusions would provide evidences to support the effectiveness of the internal control system and experience for improvement of the internal control policy guidance.Firstly,internal control quality can be measured by internal control index which is developed by the Shenzhen DIB company,debt financing refers to bank loan that contains three aspects which are debt scale,debt maturity and debt cost,the thesis makes empirical study about governance effect of internal control quality on debt financing.Empirical results indicate that higher internal control quality can help company improve efficiency of internal governance and information quality,alleviate information asymmetry between enterprise and creditors,and reduce the agency costs within enterprise.Based on risk reduction,enterprises can obtain more credit funds from bank,which have longer debt maturity and lower interest rate.But this governance effect is showed more significantly in non-state-owned enterprises than state-owned enterprises,suggesting that non-state enterprises lack credit support advantage of state-owned enterprises because of property rights,bank credit risk assessment will pay more attention to enterprises’ internal control quality,the higher internal control quality is,the more longer financing period is and the lower credit cost is.In order to investigate internal control governance effect on loan financing from different regions enterprises,this thesis measures regional marketization degree with marketization index developed by professor Fangang,which can reflects comprehensively differences of corporate external governance environment between every region.This index includes five aspects such as government intervention to the market from a macro level.Study found that non-state-owned enterprises in low marketization region whose internal control have significant influence on enterprise debt financing,compared with the high degree of marketization.The conclusion shows internal control effect will be affected by enterprise property rights and macro environment,which presents certain substitution effect between marketization degree property and internal control quality.Secondly,at the industry level,empirical study contains two aspects that market competition strength and product competitive advantage have respectively effects on relation between internal control quality and debt financing,research conclusions indicate that product market competition intensity can prompt and stimulate enterprise to improve internal control quality so that enterprise can get more debt financing whose maturity becomes longer and the cost of debt financing is more lower when industry market competition strength is higher.Further study showed more significant correlation between debt financing and market competition exists in non-state-owned enterprises rather than state-owned enterprises.On the other hand,when company are in a less competitive position in the industry,improvement of internal control quality can also help company get more loan financing,loan term is longer,credit cost becomes lower.Thirdly,at the micro level,this thesis makes discussion that external audit supervision has influence on correlation between debt financing and internal control.Empirical results indicate that higher quality of internal control can be more conducive to get more debt financing for enterprise,loan maturity becomes much longer and loan costs become lower based on reputation mechanism,when enterprise is audited by the "non-top-ten" compared with "top-ten".Compared with the standard audit opinion,non-standard audit opinions can lead that relationship between internal control quality and debt financing is more significant.Further study indicates that when auditor switching happens,the higher internal control quality is,the more corporate debt financing is,the longer loan maturity is and the lower debt cost is.Study conclusion shows that there exists a certain substitution effect between external audit and internal control to some extent.In conclusion,based on the related literature at home and abroad,combined with our countries’ bank credit risk assessment and risk management requirements of enterprise internal control specifications,this thesis examines impact of enterprise internal control on debt financing under different external governance environment On the one hand,it enriches the existing theory research on the effectiveness of internal control,but also expands research field of the macro environment and micro enterprise behavior.Research results will be helpful for regulatory authorities and commercial banks to put forward some more effective management measures.Main research conclusions have also important theoretical value and practical significance to standardize the implementation of enterprise internal control and improve the efficiency of bank credit.