The Effects Of Disclosure Of Internal Control Deficiencies On The Cost Of Equlty Capital

At present, the standard is in the process of gradual implementation. Research on the relationship between the disclosure of internal control deficiencies and the cost of equity capital can understand the economic consequences generated by internal deficiencies, as so to help managers to strengthen internal control construction consciousness, also to strengthen the initiative and positivity of implementing internal control standards. The existent of internal control deficiencies illustrates that the internal control system is not complete or the operation is not effective, which can reduce the quality of company’s financial report and increase the risks of company business management. The disclosure of the internal control deficiencies can help investors know about the real problems of internal control and show the signals of both unreliable quality of financial report and the greater risks of management, which pushes investors to raise the risk assessment, hence the cost of equity capital may increase. The paper mainly examines how the condition of disclosure of internal control deficiencies in2010within the listed company in Shenzhen Stock Exchange Mainboard can affect the cost of equity capital in2011. The results reveal that the disclosure of internal control deficiencies is in indistinctive positive correlation with the cost of equity capital.This suggests that the disclosure of internal control deficiencies failed to give the signal to the capital market in China.Through the analysis, the paper argues that the indistinctive positive correlation may be caused by the following reasons:first, the classification of the disclosure of internal control is fuzzy, which leads to the consequence that investors can’t identify the relevant and important information; second, the present internal control self assessment report is not required to be audited by the strong hand, which may lead to the misadventure quality of internal control self assessment report; third, due to the just implementation for internal control standard system, investors have inadequate understanding about internal control deficiencies.