Research On The Relationship Between Intenal Control And Executive Pay-company Performance Sensitivity Of Cross-listed Companies Of "A+H" Shares

Most of the previous studies analyzed economic consequences of internal controlfrom the perspective of earnings quality, reliability of financial reporting etc. Therewere very few studies of the relationship between internal control and operatingobjective. Due to the presence of principle-agent problem, companies must establishmonitoring and incentive systems to restrain agent from selfish behavior and improvethe company performance, also need to sign the pay-performance contract with agentwhose payment will be linked to the company performance so as to compensate fortheir opportunity cost. Enterprise Internal Control Supporting Guidelines wasimplemented among companies listed inside and outside China at the same time fromJanuary1,2011. They were forced to issue the Audit Report on Internal Control in2012. This paper chooses China’s cross-listed companies of "A+H" shares from2009to2011as a sample to make an empirical research on the relationship bewteeninternal control and executive pay-company performance sensitivity.First, the paper builds evaluation index to evaluate the effectiveness of internalcontrol of the sample companies. The evaluation result shows that companies withinternal control in excellent, general and poor quality respectively account for about40%,45%and15%. The percentage of excellent quality goes up, while that of poorquality goes down from2009to2011. Secondly, the paper constructs models makeregression analysis of executive pay-company performance sensitivity and therelationship between the effectiveness of internal control and executive pay-companyperformance sensitivity. Meanwhile, the paper do robustness test by using EPS as analternative variable of company performance. The regression result indicates that therelationship bewteen executive pay and company performance is significantly positive,and the incentive system of pay-performance contract can effectively solve theprinciple-agent problem. Also, the relationship between the effectiveness of internalcontrol and the sensitivity of executive pay-company performance is significantlypositive. That is, there’s collaborative relationship between internal control andoperational objective, and the monitoring system of internal control is helpful to solvethe principle-agent problem. Lastly, how time course impacts the relationship ofinternal control’s effectiveness and executive pay-company performance sensitivity.This analysis shows that, mandatory disclosure and time course can improve theeffectiveness of internal control and the cooperativity between internal control’s effectiveness and executive pay-company performance sensitivity.The paper not only enriches the research on the consequences of informationdisclosure of internal control, but also provides guidance to strengthen governmentoversight and optimize corporate governance as well as internal control. At last,recommendations are made basing on research findings, including strengthen andimprove the effectiveness of internal control and strengthen supervision of thegovernment departments to improve the quality of information disclosure of internalcontrol.