Quality Of Internal Control And The Cost Of Debt Capital

The "basic norms of internal control" introduced in June2008requires listed companies to self-evaluate for effectiveness of internal control, and issues the internal control self-assessment report by forensic certified public accountant, since then, China’s listed companies mandatory internal control disclosure kicked off. Whether Internal control mandatory information disclosure of listed companies can contribute to improving the effectiveness of internal control or not? The information asymmetry among company, the creditors and other stakeholders, whether can get effective mitigation through mandatory disclosure of internal control? Whether the company’s cost of capital will reduce with the raising of the level of internal control? All of these issues, become to the common concern of regulators, practitioners and theorists. For the study of internal control effectiveness and its economic consequences, the overwhelming majority scholars focus on the effectiveness of internal control and the relationship between the quality of accounting information, the existing literature from point of view of information asymmetry between creditors and the company, study impact of the internal control level improvement to cost of capital of corporate debt. Creditors, in addition to shareholders and managers, is another company’s basic interests of the parties, the creditors in corporate governance play an active role, is of great significance in our present imperfect state of corporate governance. In this paper,2009-2010Shenzhen listed companies as the study sample, based on listed company’s internal control self-assessment report disclosed internal control problems, to build internal control index and internal control deficiencies two indicators to measure the level of internal control standards, make the theoretical analysis and empirical test for relationship between the level of internal controls and the cost of debt capital. Empirical study found that:the higher the index of internal control, that means more problems in internal company control, the higher cost of capital of company’s debt; relative to the substantial defects company that is no internal control, the company with the substantial defects in the internal control has a higher cost of debt capital. This means that the level of internal control have a negative correlation with the cost of debt capital, the higher the level of internal control, the lower cost of debt capital. This study concludes that the disclosure of internal control information not only can improve the information asymmetry between the company and the creditors, inhibit debt capital markets adverse selection problem on the positive role; and promote the company through continuous improvement of internal control standards, efforts to reduce business risk, ultimately reduce the company’s cost of debt capital.