The Influence Of Internal Control Defects In Listed Companies On Debt Financing Cost

Internal control defects are the most intuitive signal to reflect the quality of internal control of listed companies, as well as the information which debt investors attach much importance to and are easy to perceive. Due to the different development situation of domestic and foreign capital market, the different institutional environment and internal control development phases, there’s few study focused on the effect that internal control defects work on debt financing cost directly, and there’s fewer papers about studies of the relationship between internal control defects and debt financing cost in mandatory disclosure phase of internal control information. From the newer perspective, using samples of Shanghai and Shenzhen A-share listed companies which disclosing internal control self-assessment report between 2009 and 2013, we discuss whether the existence and disclosure of internal control defects can effectively reduce information asymmetry between both sides of debt contract, so as to affect the cost of debt financing. By comparing the results of the empirical analysis, we verify the implementation effect of mandatory disclosure of internal control information, which has great theoretical and practical significance for creditor protection and to the promotion of the construction and disclosure of internal control system.To discuss the question, according to whether the government demands mandatory disclosure of internal control information, the phase of internal control information disclosure is divided into stages including voluntary stage and mandatory one, thus samples collected are divided into samples of voluntary and mandatory group. We test the effects of the disclosure and existence of internal control defects on the cost of debt financing with two groups of samples. The empirical results show that the disclosure and of existence internal control defects both have significant positive effects on debt financing costs, but the existence of internal control defects has much more influence on debt financing costs than the disclosure of internal control defects, which indicates that the disclosure of internal control defects can not reflect the real situation of internal control defects exist in listed companies, even in the mandatory disclosure phase of internal control information, the level of disclosure of internal control defects has not yet reached policies’ requirement. By comparing and analyzing empirical results of two stages, the positive impact that internal control defects disclosure on the cost of debt financing in mandatory disclosure is greater than that in voluntary disclosure phase, which proves that the listed company’s mandatory disclosure of internal control information system has showed some effects. Based on our conclusions, we finally give some suggestions on the construction of internal control system as well as the improvement and implementation of internal control information disclosure system in the future from perspectives of regulators, listed companies and debt investors in the end of the paper.This study makes contributions in two aspects. First, it enrich literature about the economic effects of internal controls defects from the perspective of debt investment, and reveal the current situation of the disclosure of internal control defects through comparing different effects of the disclosure and existence internal control defects on debt financing cost. Second, through comparing the empirical results of two stages, the effectiveness and rationality of mandatory disclosure of internal control information is verified from the angle of the debt financing cost, which provides some references for the implementation and supervision of mandatory disclosure of internal control information system.