The Effect Mechanism Of Political Connection And The Effectiveness Of Internal Control

Internal control is a component part of modern enterprise management and theguarantee of enterprise sustainable development. But internal control is alwaysembedded in an effective interaction or a variety of social ties. Political connectionrefers to the connection between enterprises and all levels government departments andthe auxiliary supporting organization.It is a widespread phenomenon that enterprisesseeking and establishing links with government all around the world.On the one hand,enterprises can use the informal alternative mechanism of political connection toimprove the "communication" efficiency with government departments so that theycan get all kinds of "scarce resources" which are helpful to the development ofenterprises. On the other hand, when enterprises have more sufficient resources, theywill more likely to construct and improve internal control, so as to improve theeffectiveness of internal control. Political connection has been a very important factorthat impact on the effectiveness of internal control.The core of this paper is to study the effect mechanism for political connectionand the effectiveness of internal control, and focusing on exploring the role ofexecutive compensation, institutional investors’ ownership, state ownership betweenpolitical connection and the effectiveness of internal control. Firstly, based on thereviewing of the existing domestic and foreign relevant literature about politicalconnection and the effectiveness of internal control, combined with the classical theory,analyzed the inner mechanism of political connection, executive compensation,institutional investors’ ownership and the effectiveness of internal control. Secondly,this study selected all A-share listed companies in Shenzhen and Shanghai stockexchange ranged from2009to2011as samples and combined with the models tocheckout all the hypothesis. We got results as follows: political connection had asignificantly positive influence on the effectiveness of internal control. And politicalconnected companies showed a higher executive compensation and proportion ofinstitutional investors’ ownership. In further inspection we found that the positive effectpolitical connection had on the effectiveness of internal control was partly achieved by influencing executive compensation and institutional investors’ ownership. That is tosay, executive compensation and institutional investors’ ownership had a partialmediating effect between political connection and the effectiveness of internal control.What’s more, by dividing the samples into two groups, we found that central levelspolitical connection had a significantly greater positive impact on the effectiveness ofinternal control than local levels political connection. Thirdly, we also found that,political connection had a greater positive influence on the effectiveness of internalcontrol in non-state-owned enterprises. That is to say, state ownership had amoderating effect between political connection and the effectiveness of internal control.Lastly, on the basis of theory and empirical analysis, and for the consideration that ourcountry in the background of the transition period, we gave some suggestions for theconstruction and improvement of the effectiveness of internal control for enterprises inChina.