Study On Interaction Of Internal Control And EVA Performance Evaluation On Inefficient Investment

Traditional theory holds that, because of the agency conflicts between shareholders and the management and asymmetric information in the capital markets, the management would undertake two non-efficiency investment behavior which contains overinvestment and underinvestment for self-interested motives. It will be harmful to shareholder value creation and sustainable growth of the enterprise. For China which is still in the process of economic transition, because of the special institutional background, the absence of state-owned business owners and insider control are serious, which led to more serious agent problem. With the government intervention, agency problems become more prominent, inefficient investment of enterprises become more serious. So faced with the complexity and severity of our state-owned enterprises inefficient investment issues, this paper argues, it may not solve the problem to research the governance issues of inefficient investment only from a single aspect.According to agency theory, an effective way to govern the inefficient investment is to establish an effective constraint mechanisms and incentive mechanisms to management behavior, which have focused on two paths and cannot substitute for each other. These two mechanisms should generate interaction that reconcile the interests of owners and operators. The internal control standards and EVA evaluation introduced by the relevant departments are such restraint mechanism and incentive mechanism. Ministry of Finance and other four ministries and the Sasacs introduced two policy assessment in 2010 and 2009 which contain EVA evaluation and internal control standards. These two policies have been given high hopes in terms of governing inefficiency investment of state-owned enterprises. The nature of internal control is to prevent adverse selection and moral hazard, and thus constraints the behavior of management through a series of institutional arrangements of checks and balances. EVA evaluation can promote the consistency of managers’behavior and shareholders as an incentive mechanism, thereby reducing agency costs. It has been proved that the high quality of internal control can suppress the inefficient investment of companies. Studies have shown that the implementation of EVA evaluation has some governance effect, the implementation of EVA performance evaluation system can significantly reduce the over-investment of Central Enterprise. However, so far, there are still no literatures combine these two mechanisms to research the interaction of inefficient investment. This paper aims to explore whether the internal control and EVA evaluation have interaction effect on inefficiency investments.EVA evaluation and internal control have been already executed in China for 4 years as restraint mechanism sand incentive mechanism, which also provides a good opportunity to research the governance role of Internal Control and EVA assessment on inefficiency investment of state-owned enterprises. Based on this, we take the data of state-owned listed companies in 2010-2013 as sample, analyze the interaction mechanism of internal control and EVA evaluation in-depth, and conduct a statistical analysis test of the interaction governance role of EVA performance evaluation and internal control for inefficiency investment. It turns out that that the implementation of the EVA evaluation system can inhibit overinvestment, but has no significant effect on underinvestment; the implementation of the internal control norms has significant inhibition on inefficient investment; The internal control and EVA evaluation have interaction effect on overinvestment but has no significant interaction on underinvestment.The innovation points of this paper mainly reflect in the following three aspects:First, it incorporate the internal control and EVA evaluation into the same framework, studying the governance on inefficient investment from the perspective of the interaction of internal control and EVA evaluation and providing a new perspective for the research on the governance of investments inefficient of state-owned enterprises; Second, it offers a unique empirical evidence of emerging and transitional markets for the inhibition of inefficient investment by internal control and EVA evaluation, examines the interaction of EVA evaluation and internal control standards systematically, enriching the literature of economic consequences of internal control and EVA evaluation and inefficient investment governance; At last, this paper studies the effects of internal control policy on inefficiency investment for the first time.The deficiencies of this paper are:first, the implementation of internal control standards and EVA evaluation system may takes a long time to really play its role on the investments inefficient. With the improvement of the internal control standard system and EVA evaluation system, the paper will do further tracking research. Second, although we try our best gathering information through the SASAC documents, business reports and official websites and other ways. But because of incomplete disclosure and manual errors, we may miss some of the information. With the deepening of the future implementation of EVA and internal control standards and the development of information and network matures, we will strive to solve the above problems in further studies. Third, the paper discusses the governance role of internal control standards system and EVA evaluation on the non-efficiency of investment, but did not further investigate the effectiveness of the implementation level of EVA evaluation and internal quality control on inefficient investment governance mechanisms, then we will further examine the issue.