The Influence Of Internal Control And External Audit Quality On Cost Of Debt

During the recent years,China's capital market has been continuously developing and improving.Debt financing has also been attached importance to and developed.However,due to the differences in internal management and external governance environment,the debt costs of different enterprises are quite different.Information asymmetry and agency conflict between enterprises and investors will lead to the increase of debt costs of companies.Internally,perfect internal control can reduce the cost of debt financing by improving the efficiency of operation and management and the quality of financial disclosure,which has been unanimously proved by foreign scholars.Compared with foreign studies,in 2006,China began to encourage listed companies to publish internal control self-evaluation reports,which opened the prelude of internal control concerns.Only in 2012 did China fully realize the compulsory disclosure of internal control self-evaluation reports.Therefore,whether internal control has the same effect on the cost of debt capital in China is still worth further study.Externally speaking,high-quality audit can also achieve the same effect by restraining management behavior and improving the credibility of financial disclosure;however,few studies have put internal control and external audit in the same framework,and further study on the cost of debt financing is even less;therefore,this paper will put internal control and external audit in the same framework to study the their impact on debt cost.What's more,in previous studies on debt cost,there are few perspectives on the combination of macro-environment and internal governance,such as the depth of financial development,the level of market development and internal governance;therefore,this paper will further study the relationship between internal control and external audit quality and debt financing costs under different market development levels and financial development depth.Firstly,this paper reviews the related research on debt financing cost,and combs the related research on internal control and external audit quality.Then,it summarizes the previous research on putting internal control and external audit into the same framework.Secondly,from the principal-agent theory,signal asymmetry theory and signal transmission theory,this paper analyses how the quality of internal control and external audit affect the cost of debt financing.Finally,based on the data of Shanghai and Shenzhen stock companies listed on the motherboard from 2013 to 2017,this paper establishes a model and makes a regression analysis to study the relationship between the three.The study finds that the cost of debt financing will decrease with the improvement of internal control quality and external audit quality,which is more obvious in non-state-owned enterprises;in addition,there is a substitution relationship rather than a complementary relationship between internal control quality and external audit quality in the role of debt financing cost and substitution relationship is stronger when the internal control quality is week.Finally,the quality of external audit internal control play stronger roles in the cost of debt financing in areas with high level of market development and financial depth.