Research About The Effect On The Insufficient Investment Impacted By The Internal Control With The Influence Of Financing Constraints

Since the exposure of the financial scandals of Enron and WorldCom, a series of policies and standards about the internal control have come into existence at home and abroad. In1992, the America anti Fraudulent Financial Reporting Council released the "Internal Control-Integrated Framework." In2004, it also issued the "Enterprise Risk Management-Integrated Framework", expanding the risk assessment factors internal control framework. In2008, by drawing on the framework of five elements, as well as reflecting the content of the "Enterprise Risk Management-Integrated Framework," the Ministry of Finance and other ministries issued jointly the " Basic Standards for Enterprise Internal Control " and then published the "Guidelines for Enterprise Internal Control" in2010. We can know that, to strengthen the internal control has become an important means of avoiding risks, enhancing value and achieving sustainable growth in the world. Related research about internal control has gradually become the focus of academic attention, and several scholars have researched the relationship between internal control and insufficient investment currently. Li Wanfu, Lin Bin and Song Lu(2011)believe that internal control has a positive effect on the insufficient investment. On the one hand, with the accurate and timely communication, internal control can reduce the information asymmetry, enhance the quality of financial reporting and improve the risk management systems, thereby alleviate the insufficient investment caused by the asymmetric information. On the other hand, with the institutional arrangements of incentives and supervision and controls on connected transactions, internal control can alleviate the insufficient investment caused by the agent.However, the positive effect of the internal control on the insufficient investment is affected by the internal and external environment. And different environment characteristics may have an different impact on it. As one of the environment factors, financing constraints will have an effect on it inevitably. So, whether the existence of the financing constraints can impact the positive effect of the internal control or not? And if different degree and different forms of the financing constraints have an different effect on it? Therefore, it is necessary to study the effect on the insufficient investment by the internal control with the influence of the financing constrains.The research methods in this paper involve the literature research, the combination of the normative research and the empirical research, the combination of the qualitative analysis and the quantitative analysis and so on. Firstly, this paper analyzes the effect on the underinvestment by the internal control and the influence on it by the financing constraints theoretically by collecting and analyzing the current literature, theories and policies, and proposes the research hypothesis. Secondly, under the research sample of China’s Shanghai and Shenzhen A-share listed companies of the motherboards, regarding Richardson (2006) investment model, building the quality evaluation system of the internal control, this paper studies empirically the effect on the underinvestment by the internal control and the influence on it by the financing constraints, and conduct the robustness test as well. Finally, this paper comes to the conclusion and puts forward policy recommendations.Based on the above theoretical analysis and empirical testing, the paper verifies the hypothesis that the internal control has a significant positive effect on the insufficient investment, and under the low degree of the financing constraints, the effect on the underinvestment by the internal control is more significant, and under the debt financing constraints, the effect on the underinvestment by the internal control is more significant.The innovation of this paper lies in:to start with, it argues that the financing constraints will impact the effect on the underinvestment by the internal control, and different degrees and different forms have different impacts; What’s more, it builds a quality evaluation system of internal control from the perspective of the integration concept, which absorbs and learns the essence of the existing research methods, and measures the quality of the internal control more scientifically and rationally. In this paper, there are also several shortcomings. First of all, the quality evaluation system of internal control it constructs relies on the disclosure of the corporate, which impacts its objectiveness and accuracy. Secondly, the measurements of the financing constraints in this paper can’t evaluate the financing constraints accurately, while are possessed of some extent of representativeness and scientificalness.