The Research On Spillover Effect Of Internal Control Based On Interlocking Directors

Currently,the existence of interlocking director network has become a common phenomenon in China’s listed companies.As an important component of social network,it is of great significance to corporate governance.In addition,internal control,as a series of procedures to implement adjustment,restriction and control within a company,is also closely related to corporate governance.In view of the fact that internal control can guarantee the internal operating efficiency and order of a company,it will also have an impact on other stakeholders,and this effect is known as the spillover effect of internal control.The purpose of this paper is to study the spillover effect of internal control based on interlocking directors.This paper takes interlocking directors and the spillover effect of internal control as the background,takes the improvement of internal control quality as the result,and takes the information transmission related to material weaknesses of internal control as the core process of the spillover effect of internal control.Therefore,based on the data collected from Shanghai and Shenzhen A-share listed companies from 2012 to2018,this paper studies spillover effect of internal control based on interlocking directors,as well as the influence of interlocking directors’ professional background and tenure status on them.The research finds that: firstly,the interlocking directorates have significant effects on the spillover effect of internal control.If the disclosing company discloses material weaknesses of internal control,and the directors of the interlocking company concurrently serve as the directors of the disclosing company,then the interlocking directors have a strong influence on the spillover effect of internal control,and the quality of internal control of the chain company is relatively high.Secondly,compared with companies without professional interlocking directors,chain companies with professional interlocking directors have stronger spillover effect and higher quality of internal control.Thirdly,compared with chain companies where interlocking directors are not served by the audit committee,companies with interlocking directors that are served by the audit committee have stronger spillovers and higher quality of internal control.In addition,in order to make the results of thebasic research more robust,this paper also carries out robustness test,that is,by changing the measurement method of variables,analyzing the significance of information transfer related to material weaknesses of internal control as the key process of spillover effect,and solving the problem of possible sample selection bias,further supporting the research hypothesis of this paper.The conclusion of the study is helpful for listed companies to understand the function mechanism of interlocking directors in inter-company information transmission from the perspective of social relations,and provides useful references for enterprises to carry out internal governance and internal control system construction in practice.