A Research On Management Control Systems Capability Index Of Listed Group Companies In China

The ultimate goal of managerial accounting research is to increase shareholder value. However, shareholders are heterogeneous. Financial investors typically are outsiders of a firm, who are relatively less involved in management control process, less knowledgeable and lack of a unified appraisal framework for firms’ management control capability. Focus of extant managerial researches are the internal management process which contribute little to such investors. With the strengthening process of financial market regulations, firms have been disclosing MCS related data increasingly. The rapid development of big data technologies made analysis of such kind of non-numerical data possible. Using firm public data such as MD&A, CSR report, internal control report and executive information etc., This paper first conducted a multiple case study on the relationship between management control capability and aforementioned public data and posit a theory that public disclosed data is a reflection of management control capability of a firm. Based on this theory, this paper built a MCS capability index leveraging big data technologies such as supervised machine learning and natural language processing. To test validity of this index, performance and return relevance was used and empirical result demonstrated there is a significant positive link between this index and current and following period of firm financial performances as well as stock return. And then this paper investigated the interaction among management control, earnings management and mutual fund shareholding activities. Empirical evidence showed that MCS capability is negative correlated with earnings management behavior and moderating the loss firms’ earnings management level. Further study reveals that controlling corporate governance factors by using earnings management as a proxy, empirical results projected that MCS capability index is significantly positive related to mutual fund shareholdings, which means fund manager take management control capability into consideration as well as governance factors. At last, this research tested the link between this index and accounting conservatism to verify whether management control exerts an influence in the profit-making process. Positive significant correlation was found between this index and accounting conservatism. Further if firm involves in over-investment, management control has a moderating effect on this over-investment to accounting conservatism result. Stronger management control capability induced more conservatism, which means the matching process of a firm with enhanced management control could be more conservative. Combining the aforementioned empirical results, the MCS capability index built by this paper demonstrated a sound validity and bridged the gap between empirical managerial and financial studies. This index also has practical implications. Investors can leverage this index as a fundamental analysis vehicle.