The Influence Of Internal Control Information Disclosure On Debt Financing

The Asian financial crisis in1997and the sensational accounting fraud scandal in2002and the global financial crisis originated from the subprime in2008all proved that information disclosure is critical to the development of capital market. Information disclosure has become one of the most heated research fields. As an important method of modern enterprise management, internal control plays a significant role in preventing and controlling financial and operational risks of enterprises. Internal control helps to ensure the business activities and realize sustainable development. The establishment and maintenance of internal control system has become the key to operational success and attracted more and more attention of the society. Banks and other enterprises, as the external shareholders, are not able to directly observe the internal control level and can only gain the knowledge from the information disclosure of internal control. The low level of information disclosure of internal control is viewed as the incompetence of internal control system, which might lead to the low quality of the financial report and accounting information and high risk of enterprise operation. Additionally, it also results in high debt repayment risk, therefore debt investors inevitably charges more for incompleteness of information. On the other hand, high-quality internal control information delivers to the debtors the signal that the internal control is weak, which further indicates enterprises that disclose high-quality internal control information hope to gain low costs of debt financing.Based on a combination of theoretical analysis, statistical analysis and regression analysis, this paper studies the influence of internal control information disclosure on debt financing of China’s listed companies. The paper firstly summarizes the background and significance of topic choice, and then reviews the present literature on internal control and debt finance both home and aboard. It then analyzes the impact of information disclosure quality of internal control on debt financing and summarizes the research hypothesis that high quality of internal control information disclosure significantly decreases the costs of debt financing and makes it easier to gain long-term debts.According to the empirical analysis part, this paper chooses non-financial companies listed in Shanghai Stock Exchange from2010to2012as the sample. It chooses the data of information disclosure from2010to2011and debt financing from2011to2012, with companies without short-and long-term loans excluded,1120samples in total. Empirical analysis chooses the one-year-lagged incremental short-and long-term loans as the proxy variable of incremental debts, one-year-lagged ratio of interest expense to short-and long-term loans as the proxy variable of debt costs, one-year-lagged debt maturity structure as the proxy variable of debt maturity structure. It also controls the enterprise size, debt ratio, operation capacity, profitability, industries and ultimate controllers as control variables. The study finds that firstly the information quality is significantly negatively related to debt costs, which means banks take internal control information disclosed by enterprises when pricing the loans. Secondly, high quality of internal control information disclosure helps enterprises to gain long-term loans, which indicates that banks not only care the quantity of financial and non-financial information, but also the quality. The higher information quality is, the less asymmetric information is between banks and enterprises, which helps with the communication and cooperation between them and lowers the possibility of debtors.