Study On The Relationship Between Effectiveness Of Enterprise Internal Control And Efficiency Of Capital Allocation

In recent decades, especially since reform and opening up, China’s capital market has experienced rapid development and become an important part of China’s socialist market economy. With the development of China’s capital market, capital allocation has attracted more and more concern. The so-called capital allocation refers to the process in which enterprise organizes its capitals between different sources and allocates them between different uses. In enterprise fundraising, capital allocation mainly solves the problem of reasonable arrangement of capital source structure. In enterprise investment, capital allocation mainly solves the problem of reasonable capital distribution. In addition, in merger and acquisition, bankruptcy and reorganization, capital allocation mostly means re-allocation of enterprise capital, while capital allocation of enterprise group is capital allocation in a broader sense. However, efficiency of capital allocation is worth most concern, because improvement in capital allocation efficiency means, through sound and effective operational mechanism of capital market and company organization structure, enterprise can allocate its limited financial capital to company with high return on invested capital and exit timely from company with low return on invested capital or investment project. Therefore, effective capital allocation greatly determines enterprise operation and future prospects. It follows that the way to raise capital allocation efficiency has become a major problem confronting CEO level. In recent years, scholars of both home and abroad have conducted enormous and in-depth studies on relevant issues in capital allocation efficiency, which have yielded many precious results. However, most of the previous studies are carried out from the perspective of company management like capital structure, and few scholars have studied capital allocation efficiency from the perspective of enterprise internal control effectiveness, and explored their internal relationships so as to shed some light upon raising enterprise capital allocation efficiency. As effective internal control helps ensuring smooth implementation of enterprise policies and principles, and correctness and reliability of economic calculation, protecting enterprise property and making it complete, secure and effective, and easing information asymmetry and information agent even if there is a sound capital market. Many previous studies show that information asymmetry and agent is among important factors influencing enterprise capital allocation efficiency. Thus, the author holds that effective internal control is beneficial to raise capital allocation efficiency and ensure proper enterprise operation and development.On the basis of previous studies, this essay firstly makes a review and summary of relevant studies of internal control effectiveness and capital allocation efficiency. Then it discusses the relatedness of internal control effectiveness and capital allocation efficiency, and analyzes impact mechanism of internal control effectiveness over capital allocation efficiency. After that, the author introduces interpretation and measure method of internal control effectiveness and capital allocation efficiency, and analyzes their relationships under different binding conditions on the basis of China’s reality. Moreover, this essay takes A shares listed company data of Shanghai Stock Exchange from2009to2010, and analyzes the internal relations of internal control effectiveness and capital allocation efficiency. Findings demonstrate that under the current circumstance of China’s capital market, internal control effectiveness can raise capital allocation efficiency to some degree. Based on the above conclusions, this essay puts forward some pertinent policies and suggestions, analyzes the shortcomings and flaws of this essay and presents future orientation for some relevant studies.This essay follows the routine of " theoretical analysis-practical validation-analysis of present situation", and explores the deep relations between internal control effectiveness and capital allocation efficiency by their theoretical analysis and practical validation in hopes of finding influence of internal control effectiveness over capital allocation efficiency and a way to raise capital allocation efficiency. This essay hopes to promote enterprise economic development, which makes a little contribution to reform and development of China’ capital market.