A Study On The Effect Of Chairman's Shareholding Characteristics On Internal Control Quality

The quality of internal control plays a significant role on the usefulness of the company's information.Also it has become the essential aspect of corporate governance and government regulation.At present,the academic research on the internal control of corporate governance mostly focuses on the collective roles such as the executive team and the audit committee,or the personal factors such as the general manager and the chief financial officer.While few studies have been conducted with respect to the chairman's ownership characteristics,which refers to the ownership ratio and equity pledge ratio in this paper.It is clearly pointed out in the law of basic norms of internal control that the board of directors and managers are the liabilitysubject and execution body respectively.Especially,the chairman plays an essential role in the quality of internal control.Therefore,our research on the influence of chairman's ownership characteristics on quality of internal control contributes to the improvement of corporate governance,capital market regulation and thereform of state-owned enterprises.In this paper,we examine the empirical relationship betweenchairman's ownership characteristics and internal control qualitybased on the data from A-shared listed companiesin Shanghai and Shenzhen Stock Exchangesfrom 2011 to 2015.Characteristics of chairman's shareholding are defined by chairman's shareholding percentage and ownership integrity.And internal control quality is represented by the internal control index of listed companies in China.The empirical regression shows that there is an inverted U-shaped relationship between the shareholding percentage of chairman and internal control quality.Also a similar relationship is found about the equity pledge ratio.The quality of internal control is higher in state-owned listed firms whose chairman holds stocks.In conclusion,we believe that the chairmen should be granted the shares of stock.Besides,the appropriate equity pledge ratio help improve corporate governance andreduce the cost of agent issues.So when the chairman 's capital demand is too strong,regulatory authorities and investors need to pay attention to the financial and operation situation of the chairmen and analyze their equity pledge behavior.