Internal Control Information Disclosure, Market Evaluation And Informativeness Of Accounting Earnings

High-quality accounting information disclosure, which is an important product when modern economic theory collide and integrate with contemporary accounting philosophy, can reduce the information inconsistency of the capital markets, improve the efficiency of resource allocation, promote sustainable economic growth. But frequent domestic and foreign financial frauds have triggered an unprecedented crisis of confidence, which makes investors have doubts of the authenticity of information disclosure, the effectiveness of the corporate governance system, the independence of intermediaries and the ability of the regulatory bodies monitoring the operation of the market. In view of this, in order to protect the interests of investors, how to improve accounting information’s quality has become a research focus. And also because of this, internal control became the focus of attention, which aims to guarantee truthfulness and integrity of financial reports, efficiency and effectiveness of business operations, compliance with relevant laws and regulations, and achievement of enterprises’ development strategies.In recent years, China has made great efforts in strengthening internal control information disclosure. The standards are developed from scratch. Now a preliminary and complete regulation framework has been established. The quality is improving year by year in terms of information accuracy, the breadth and depth of the information and the use of investors and intermediaries. However, there are still problems such as untruefulness, inadequacy, lack of timeliness, and stressing form over substance. In a word, the evaluation system is yet to be improved.I build a quality evaluation index system based on investors’demand, taking the information hierarchy model of Deqiang Deng’s quality evaluation system as reference system, combining relevant laws and regulations and some points of Xiaolan Zhang, Haojie Shen, Mo Yang’s design of internal control information disclosure’s quality, which includes4Primary indicators,13secondary indicators and10Tertiary indicators. It’s evaluated from four aspects, reliability, relevance, comparability and understandability, with the aim that internal control information should at least meet the target of being useful to the investors’decision making and fiduciary duties.From the descriptive statistics of the Shenzhen stock exchange’s a-share listed companies (totaling1199samples) on the main board from2009to2011, it is discovered that the sampled companies’ quality of internal control information disclosure have been improved,9.02%are excellent,64.91%are good. To look at it from different years,"Enterprise Internal Control Basic Norms" which was promulgated in2008enhanced information disclosure’ quality to some extent but to limited effect. Listed companies’quality of internal control information disclosure was still low in2009and2010."Enterprise Internal Control Guidelines" which was promulgated in2010made internal control information disclosure mandatory and clearly oriented, significantly improving the level of internal control information disclosure’s quality of sample companies in2011. As for the guidelines enforced on the Motherboard in Shanghai and Shenzhen Stock Exchange on January1,2012, the improvement effect is to be found out.Many scholars study many aspects of internal control information disclosure in the background of introducing "Enterprise Internal Control Basic Norms" and relevant Guidelines. As an important channel of getting information in capital markets, the concern of which economic consequences appears to be particularly important. Studies show that different scholars have different ideas about whether the internal control information disclosure can lead to the related market evaluation. Whether it affects informativeness of accounting earnings are all circumstantial evidences. Because of this, in this article I attempt to combine internal control information disclosure, market evaluation with informativeness of accounting earnings and to make empirical test of the relationship of the three.Based on the principal-agent theory, internal control information disclosure can avoid adverse selection and moral hazard to some extent. The internal control information the agent disclosed will be important information for investors. According to signal transmission theory, the better the internal control’s quality, the more inclined the company is to more detailed internal control information disclosure. Management with a large number of high-quality information on investment opportunities will pass the information to potential investors through the selection of relevant policies, and thus affect the investment decisions of investors. In addition, the earnings information, other financial information as well as non-financial information will affect investors’ trust behavior. As the evidence of listed companies’ internal control implementation status are in good condition, financial reporting and audit reports are true, earnings information are reliable and consistent, It can guide investors to make investment decisions. According to this, we assume:internal control information disclosure has information content and it will affect the company’s share price; the better internal control information disclosure’s quality, the higher the market evaluation.Furthermore, it can improve the companies’internal control, and an effective internal control can improve the quality of accounting information. Therefore, internal control information disclosure would affect the earnings quality and earnings quality would affect share prices. The better the internal control information disclosure’s quality, the higher the companies’ informativeness of accounting earnings. At the same time, corporate has an increasing influence on stakeholders through internal control informational disclosure. Stakeholders will take it as an information trail, and the behavior of proactive internal control information disclosure will raise people’s awareness of expectations, attitudes, and tendency to invest. The integrity and the validity of the conclusions will affect investors’judgment on continuous profitability of companies, give investors a stable and optimistic future earnings expectations, affect investors’ decisions. In addition, it can enhance the company’s reputation. Enterprises with good reputation can improve the reliability of accounting information and facilitate the enforcement of accounting information in the contract. Therefore, the performance of the enterprise can enhance their reputation, get the trust of stakeholders of contracts, especially using accounting information as contracts indicators. According to this, we present another assumption:the better internal control information disclosure’s quality, the higher the informativeness of accounting earnings.In this paper, I will use the annual report data of the Shenzhen stock exchange’s a-share listed companies on the main board, stock data of listed companies as well as hand-collected data of internal control information disclosure’ quality to make empirical research. I manually collected quality indicators of internal control information disclosure through self-evaluation report, internal control audit report, independent opinions of independent directors on internal control self-assessment report, the board of supervisors on internal control self-assessment report from the Shenzhen stock exchange and Juchao. Take cumulative excess returns before and after the five-day disclosed in audit report as indicators of market evaluation, and take ROE as profitability variables. The results show that the two assumptions are all true. It suggests that market can fully understand that internal control information disclosure has incremental effect on the companies’ existing level of information disclosure, is supportive of the quality of the financial information, and can significantly affect the informativeness of accounting earnings. Therefore internal control information disclosure has value to potential gains and decision-making.According to the empirical findings, I have three suggestions. Firstly, all employees of the company should pay attention to internal control, strictly comply with the company’s internal control system, and when they find deficiencies of internal control, they should report to management in time, develop appropriate coping strategies and prevent risk of internal control. Annually the company should detailedly and objectively evaluate their internal control structure and hire an accounting firm to audit the internal control system. Secondly, various regulatory departments should strengthen supervision. Internal control policies and measures should be put in place before reaching the deadline of "Enterprise Internal Control Guidelines". When Certified Public Accountant audits internal controls, they shall maintain an attitude of professional suspicion and professional judgment, effective constraint on the company’s misconduct. In addition, Shanghai and Shenzhen stock exchange can refer to the Shenzhen Stock Exchange’s evaluation of the quality of information disclosure to set up a quality rating system. Thirdly, investors should make real-time monitoring of listed companies’ disclosure. Whenever they find their disclosure is inconsistent with the actual conditions, they should actively and positively report this to related departments.This paper makes some contributions in the following aspects. firstly, taking the perspective of information users particularly the majority of investors to identify its intrinsical link with market evaluation and the informativeness of accounting earnings, therefore reduce the information inconsistency of stock market; provide a theoretical basis for the state to mandate disclosure; while encouraging management to improve internal controls, support enterprise’s healthy and stable development. Secondly, in this article we sampled three years’ data before the formal implementation of the "Enterprise Internal Control Guidelines", make multi-angle investigation of the relationship between the internal control information disclosure, market evaluation and informativeness of accounting earnings. The conclusions are closer to the real situation and could be more useful to information users because the most updated data were studied. Thirdly, we provide investors a more effective way to determine internal control information disclosure’s quality.The limitations of this study are mainly manifested in the following three aspects. Firstly, in the calculation process of the relevant quality, we should assign specific indicators under the four quality characteristics of reliability, relevance, comparability and understandability. Manual collection of data cannot avoid subjectivity in the process of quantization. Secondly, in this paper, we use the event study method to determine the point that the information begins to interfere with the price formation mechanism, so we must keep investors’ judgment in a point, but disclosure of the annual report is at the same time, and the annual report itself has informational content. Although we considered more standards in sample selection, it is impossible to completely eliminate the interference of the annual report information on the share price and the model still has noise in a certain degree. Thirdly, in this article we only choose companies’multi-year data as samples listed on the main board of Shenzhen tock exchange, which would somehow affect the persuasiveness of conclusions.