Internal Control Defects With Its Repair,Firm-Bank Equity Connection And The Cost Of Bank Loan

In recent years,the occurrence of financial fraud incidents such as the cases of Enron and World Com has made the disclosure of enterprise's internal control information highly valued by investors and regulators,Since the promulgation of the Sarbanes-Oxley Act in the United States,the Chinese government has started the construction of internal control standard system from 2006,issuing a series of policies and regulations that require companies to disclose internal control self-assessment report successively in the following years and adjusting the scope of Compulsory disclosure of internal control timely to explain the effectiveness of internal control through the information of internal control defects(hereafter cited as ICW)which enterprises disclosed.According to the existing literature,disclosing the information of internal control can enhance enterprises' information transparency,reduce information asymmetry,improve investors' transparency of decision-making,and then raise the efficiency of capital market ‘s operation and resource allocation.As an important form of information disclosure of internal control,disclosing ICW provides an important basis for investors to judge the effectiveness of enterprises' internal control,earnings reliability and operational efficiency.Therefore,the economic consequences of the disclosure of ICW have become a hot topic in the academic and practical circles.However,because the construction of internal control system in our country has just started,the full implementation of relevant institutional norms is a long-term process.At the present stage,the standard of ICW in Chinese enterprises isn't clear,which affects the accuracy and effectiveness of the information of ICW.Based on this,it's of great advantage to discuss whether the disclosure of ICW can affect the behavior of stakeholders' decision-making combined with the Chinese Listed Companies' basic information of ICW during the period of the internal control standard system's construction.It's because that in the process of improving the relevant laws and regulations,studying the impact of disclosing ICW on the stakeholders' decision-making can not only enhance the corporate value,but also provide an important realistic basis for government departments to formulate and perfect the relevant laws and regulations.As we all know,bank loan is one of the important sources of external financing for Chinese enterprises,which is very important to the survival and development ofthe enterprises.In the loan contract,the cost of the bank loan can not only affect the income of the bank directly,but also can play a better role in the supervision of the debtor.Due to the existence of information asymmetry in China's capital market,when enterprises disclose ICW,it will decrease the ability to evaluate enterprises' operational risk of bank who mainly assesses enterprises' risks based on the financial reports.At this time,to make up for the defect of obtaining information,does the bank will increase the cost of bank loan? To a certain extent,the number of ICW can reflect the severity of enterprises' defects,so does the quantity and severity of ICW also affect the cost of bank loan? In addition,different types of ICW indicate that there are problems in different aspects of the enterprise,so are there any differences in the impact of different types' defects on bank loan cost? Based on the dynamic perspective of ICW,does the overall repair of ICW will reduce the loan cost?In the period of economic transition in China,the nature of property right is one of the most important aspects of China's institutional environment,so will the above effects be different in enterprises of different property rights? In addition,relationship as a resource plays an important role in the development of enterprises.Establishing and maintaining good relationship with banks can alleviate the pressure of financing.However,unlike the state-owned enterprises(hereafter cited as SOEs)that has credit preferences in the aspect of financing,the existence of credit discrimination and credit rationing in China lead to the more intentions of non-state-owned enterprises(hereafter cited as Non-SOEs)to build the relationship with banks.As one of the important way to build relationship with banks,does the behavior of holding bank ownership will have a certain impact on the above effects in different types of enterprises.Based on the nature of enterprises' property right,this study examines the effect of ICW with its repair and firm-bank equity connection on the the cost of the bank loan by taking the A-share listed companies from 2007 to 2016.Firstly,this paper finds that when the enterprise's internal control has defects,the cost of the bank loan will be increased.Further more,the more the number of ICW and the more serious the ICW are,the higher the cost of bank loan.In addition,after dividing the ICW into financial-related ICW and non-financial-related ICW,we find that all the two defects will raise the cost of bank loan.But compared with the non-financial-related ICW,thefinancial-related ICW has a greater impact on the cost of bank loan.When the enterprise's ICW has been repaired holistically,the cost of bank loan will be reduced.Secondly,on the basis of considering the nature of property right,this paper finds that the above effects are still significant in Non-SOEs,but we haven't seen significant results in SOEs.Finally,after introducing the factor of firm-bank equity connection,compared with Non-SOEs with bank ownership,in Non-SOEs which don't hold bank ownership,the above impacts were stronger.However,for SOEs,whether they have equity connection with bank,the above effects aren't obvious.The results show that disclosing the ICW is a signal that the companies' financial reporting and operating conditions may be dangerous,which will lead banks to require higher return to make up for the higher risk through raising the cost of bank loan significantly.And the repair of the ICW is beneficial to reduce the information asymmetry between banks and enterprises,so it can reduce the cost of bank loans.However,the effects of the ICW with its' repair will be affected by the property right and the relationship between the banks and the enterprises.Therefore,from a dynamic perspective,this paper provides a new recognition to understand how the disclosure of internal control information affect the cost of bank loan in emerging market countries.Emphasizing the initiative of enterprises(especially Non-SOEs)when they are facing credit discrimination,namely reducing the adverse effects of ICW on the cost of bank loan through repairing the ICW actively and establishing equity connection with banks is very important to strengthen the standard construction of internal control system,alleviate the enterprises'(especially Non-SOEs)financing constraints,and then promote the economic development.