Can Political Connections Block The Influence Of Internal Control Deficiencies On Credit Constraints?

With the rapid development of Chinese economy,the private economy started from scratch and up to now has become the greatest power to promote the prosperity of Chinese economy.However,as the results of credit discrimination faced by private enterprises,the financing constraints has seriously hampered the development process of Chinese private economy.According to the investment environment survey by the World Bank,75% of Chinese private enterprises consider that the main obstacle to their development is the financing constraints.And the main reason for this credit constraints is that banks and other credit institutions do not trust the private enterprises because of the information asymmetry and the principal-agent problems.As an important corporate governance mechanism,the internal control can improve the quality of accounting information effectively,also can reduce the opportunistic behavior of the management or the controlling shareholders by the inner supervision and restriction,then the information asymmetry and the principal-agent problems can be alleviated and the trust from banks can be enhanced.In June 2008,April 2010,the five ministries including the Ministry of Finance,Securities Regulatory Commission jointly issued The Basic Norms of Internal Control for Enterprises and The Guidelines of Internal Control for Enterprise which constructed the system of internal control in China.Then the Securities Regulatory Commission issued [2011] No.031 document,ask that the pilot listed companies must disclose the internal control self-assessment report and the internal control audit report.This provision indicates that the internal control information disclosure in China has transited from voluntary stage to mandatory stage.This transition also means that taking the internal control information as criterion has become feasible when banks allocate the credit resources.Thus,the relationship between internal control and credit constraints,or can enterprises ease their credit constraints by improving the quality of internal control have gradually become the focus of public attention.But on the other hand,China is a typical "relationship-oriented" society,more and more enterprises would like to build political connections by running for NPC deputies,CPPCC members and other ways in order to get the scarce resources from government,so that they can realize their own interests.So in the relationship between banks and enterprises,will the political connections impact the credit decisions of banksand other creditors,obstruct the function of internal control,or impede the implement of internal control in China?This is an important question we need to face.Given the current situation that few scholars has studied the combined effects of political connections and internal control,we believe that this study has high academic value and practical significance,not only extend the existing research findings,but also promote the implementation of internal control for enterprises and government organizations.In order to study these issues,on the basis of the previous literature about credit constraints,internal control,political connections and the basic theory including asymmetric information theory,principal-agent theory,rent-seeking theory and so on,this paper firstly analyzes the path of how internal control deficiencies impact credit constraints and the path of how political connections plays a role.Secondly,based on the theoretical analysis,we propose two hypotheses,and then construct the regression model,introduce dependent variables,independent variables and control variables after drawing on the previous research results.Finally,we choose private companies listed on A-share in the year of 2012--2014 as research samples,test the influence of deficiencies in internal control on credit constraints and the regulatory effect of political connections by using descriptive statistics,correlation analysis and OLS regression analysis.The results showed that:(1)If the enterprise has deficiencies in internal control,both the information asymmetry and the principal-agent problems will be aggravated,and finally exacerbate the credit constraints,such as higher debt costs,fewer new loans and shorter loan period.(2)The political connections in private enterprises will block the influence of deficiencies in internal control on credit constraints,especially in the aspect of new loans and loan period,while this shielding effect will vary with the strength of political connections.Finally,combined with the realistic background and the conclusions this paper draws,we put forward some suggestions from three perspectives,the enterprises,regulators and the banks.We hope these recommendations could improve internal control construction,regularize the relationship between government and enterprises,also ease the credit constraints.