Internal Control,External Audit Quality And Debt Financing Cost

For enterprises,activities in the market include fund-raising activities,business activities and investment activities.And the financing activity is the cornerstone of the survival of the enterprise,is the other two prerequisites.In todayundefineds competitive incentive market,if enterprises want to survive and continue to grow,in addition to the need for innovation,good management,but also need to obtain a sustained and sufficient source of funds.The financing mode of the enterprise includes internal financing,that is,the retained income from the business activities is used as the capital flow,and the other way of financing is external financing.In the process of external financing,companies tend to prefer debt financing,because the cost of debt financing is relatively low compared with equity financing.Therefore,one of the problems that enterprises must pay attention to in the process of operation and development is to control the cost of debt financing.Otherwise,it may be because the cost of debt financing is too high that the enterprises will eventually become heavily in debt and break the chain of funds.Leading to bankruptcy and liquidation of the enterprise.In view of this,exploring how to find a way to reduce the cost of debt financing under the premise of ensuring capital flow has become the only way for enterprises to develop better.Previous studies have shown that the cost of debt financing increases because of agency conflicts and asymmetric information between creditors and firms.In foreign studies,it can be found that the design and implementation of effective internal control and high-quality external audit can play the role of internal inspection and external supervision,thereby alleviating the agency conflict and information asymmetry between creditors and enterprises.To reduce the cost of debt financing,however,the conclusion is whether there is the same effect and function in the capital market with Chinese characteristics,which remains to be tested.Moreover,from the point of view of existing studies,the role of debt financing costs in the same framework of internal control level and external audit quality is seldom studied.Starting with the governance mechanism of auditor reputation,this paper theoretically analyzes how internal control and external audit play their roles of internal inspection and external supervision,and reduce the cost of debt financing.Then through the method of empirical analysis,we select all the listed companies of A shares in the two cities from 2012 to 2016 as the research samples,and use Stata and other statistical software to test the effect of internal control and external audit on debt financing costs.If the quality of external audit is divided into two groups,how does internal control play its role?First,the higher the level of internal control,the lower the cost of debt financing.Secondly,the higher the quality of external audit,the lower the cost of debt financing.Finally,when the external audit quality is high,the role of internal control to reduce debt financing costs is weakened.According to the conclusion of the study,this paper puts forward the following suggestions:first,to establish and effectively implement the internal control mechanism,that is,the enterprise designs the internal control mechanism in.accordance with the characteristics of the enterprise,and makes this mechanism to be implemented effectively.Secondly,improve the quality of external audit,that is,accounting firms and auditors should improve their professional standards,to ensure that the audit report issued is reliable.Finally,the relevant supervisory departments issued relevant policies.With the joint efforts of these three,the interests of creditors can be protected and the win-win situation between enterprises and investors can be realized.The innovation of this paper has two aspects:first of all,from the existing literature,in the relevant research,scholars mostly use "the top ten domestic firms"as the proxy variable with high audit quality.But this metric implies the assumption that if the top 10 firms have a high audit quality,it may not be the case that a company with a low credit rating or a company with a high default risk,if the firm audited the firm is in the top ten.That means higher audit quality and lower debt financing costs,which is clearly inappropriate.Therefore,this paper studies the role of external audit quality on corporate debt financing costs,and examines whether external audit really plays its proper governance function.This paper takes the market share of accounting firms as the proxy variable of audit quality.Secondly,by reading the literature,the influence factors of debt financing cost are studied by the external audit alone,or the influence of internal control on debt financing cost.There are few research papers linking external audit quality and internal control quality,so this paper groups the sample companies according to the audit quality.And on this basis,to study whether the influence of internal control level on debt financing cost will be different under different external audit quality of listed companies.Therefore,the research on debt financing cost of listed companies is carried out in the internal and external environment.Moreover,in the regression analysis,the empirical test uses the data of all the listed companies in the two main boards from 2012-2016 to provide a longer time span,more reliable and persuasive data for the study.