Research On Effect Of Internal Control Deficiency Heterogeneity Over Independent Institutional Investors Shareholding Ratio

In 2014, poor supervision of subsidiary company gave rise to listed company Wanjiang Logistics’ credit default scandal. The companies’ stock plunged, institutional investors throw them quickly, securities investment fund sold half of the stocks its hold compared with last year, QFII and the social security fund even took no account of it; Tibet Rhodiola Pharmacy, in comparison, was found of corporate governance chaos and major shareholders and independent directors involved in battle for financial control, which lead to the Company’s stock price plummeted. Social security and QFII left it quickly. In sharp contrast, Shanghai Jahwa Corporation who got the internal control auditing opinions negative report issued by PWC seemed immune from that. The disclosure of such information did not result in its stock price dive but boomed on that day, and social security and QFII were still in favor of it. All of them share problems in internal control and financial scandals to some degree, but why Wanjiang Logistics and Tibet Rhodiola Pharmacy are suffering, Shanghai Jahwa Corporation managed to stand along? That makes us question whether the difference of internal deficiency could cause the institutional investors to treat differently, nor the extent and depth of it can make a difference?In theoretical part, this article applies multiple principal-agent theory to explain the necessity of internal control deficiency exist firstly. Due to information asymmetry, potential targets and interests conflicts and the disagreement between owner and operator, therefore, how to design an optimal contract balance supervision cost, credit costs and residual loss to become the answer to solve this confusion, but the existence of the internal control deficiency provide managers with motivation and excuse to escape from their responsibilities, financial fraud and manipulation behavior. Secondly, this paper applies Institutional Investors Efficient Monitoring Hypothesis to expatiate on its reliable supervision. Big shareholders are in dominant position, they can either support or tunneling the company; Small and medium-sized investors would prefer to "vote with their feet" or "take free-ride". In conclusion, the introduction of institutional investors can not only keep equity relatively concentrated, play its supervisory management function, but also restrain the big shareholders from erosion the company by equity restriction. While, we also need to rule out the gray institutional investors who may manipulate or collude based on the commercial interests, therefore, institutions like social security, QFII, securities investment funds known as independent institutional investors can play institutional guarantee of effective supervision mechanism. Finally, the paper builds an evaluation system of internal control deficiency based on the theory of internal control deficiency heterogeneity, and explains the mechanism of how internal control deficiency impact independent institutional investor shareholding.In empirical part, this article selects companies whose internal control are issued as non-standard audit opinions from Shanghai and Shenzhen Stock Exchange during the year 2011-2014 as samples, using independent institutional investor shareholding ratio as the dependent variable, relevant internal control deficiency as independent variable, and adopting non-equilibrium mixing effect of regression model to calculate the influence of internal control deficiency heterogeneity to institutional investors holding, therefore, it can provide reference for companies to strengthen their internal control recommendations.Consequently, the paper concluded that:(1) the existence of the internal control deficiency will inevitably cause independent institutional investors underweight;(2) in the presence of internal control deficiency of risk assessment and control activities components, independent institutional investors tend to avoid them. In other words, the deficiency at aspect of risk assessment or control activities is more likely to induce a blind spot for a deeper level control.(3) When the internal control deficiency of control environmental or supervision elements exist, independent institutional investors have to dodge, but not as severely as the former two. For this, the paper puts forward the corresponding suggestions for practice. Specifically:(1) set up the risk management consciousness, and implement control activities;(2) perfect the control environment, and make good self-monitoring.The main innovation of this article is:(1) try to a clear definition of internal control deficiency heterogeneity, and explore differentiation on how the internal control deficiency heterogeneity influence independent institutional investor shareholding, so as to enrich the research angle of view and scope of internal control related fields;(2) try to use non-equilibrium mixing effects of regression model to explain the correlation of different internal control deficiency category and the independent institutional investors, which may has certain innovation in research methods.