The Effect Of Disclosure Of Internal Control Deficiencies On The Cost Of Equity Capital

In recent years, the financial fraud events of the listing corporation emerge endless in domestic and abroad. the importance of internal control has gradually attracted the attention of supervision departments and scholars.In 2008, the Ministry of Finance and other five ministries jointly issued the Basic Norms of Enterprise Internal Control, which requires the implementation of the standard of internal control self-assessment report issued by the listing Corporation.In 2010, the promulgation and implementation of the Guidelines for Enterprise Internal Controlmade further demands about the disclosure of internal control information,the guidelines not only defined the internal control deficiencies that the listed company may exist, but also clearly demanded the disclosure of internal control deficiencies and the corrective measures to be taken in the control self-assessment report.Since then, the disclosure of internal control defects become the academic focus of attention.In the initial stage of the internal control system construction, by studying the impact of internal control information disclosure on the cost of equity capital,we can understand the economic consequences of internal control defects,enhance the management of internal control, and increase the enthusiasm and initiative of the listing Corporation to implement internal control laws and regulations.This paper adopted both the theoretical analysis and empirical approaches,studied the relationship between internal control deficiencies disclosure and the cost of equity capital. Based on the definition of relevant concepts and related literature review, this paper made a theoretical analysis on the impact of the disclosure of internal control deficiencies about the cost of equity capital based on the principal agent theory, asymmetric information theory and signal transmission theory. Then, by selecting data of the 2011-2014 board in Shenzhen A-share listed companies as research samples, based on the sample firms to explore whether the disclosure of internal control defects and whether the disclosure of substantive internal control defectsused as the explanatory variables in hypothesis1 and hypothesis 2, and on the basis of the introduction of control variables, we built the relevant model, testedempirically the impact of the listed company’s disclosure of internal defects on its next year’s cost of equity capital. And then analyzed the status of disclosure of internal control reporting and internal control deficiencies;The results showed that:the disclosure of internal control defects will lead to a significant rise in the cost of equity capital of the listing corporation.Finally, according to the research conclusion, this paper put forward the countermeasures and suggestions of improving the internal control information disclosure of listing corporation from two aspects of the listing corporation itself and the external regulators.