Effectiveness Of Internal Control, Internal Cash Flow And Inefficient Investment

Investment is the core content of enterprise production and operation andcontinued growth of the source motive force. However, the information asymmetriesand principal-agent problem often makes the investment is highly dependent oninternal cash flow, plenty of free cash flow are hotbeds of over-investment, and theinternal cash flow shortage often lead to under-investment. In recent years, Scholarshave conducted massive research on the governance issue of endogenous financingand inefficient investment sensitivity. However, due to the complexity of the internalcontrol measure and data availability restrictions, little research on internal controland corporate investment efficiency. Therefore, this paper attempts to examine theeconomic consequences of the internal control from the perspective of investmentefficiency, In order to provide the reference opinion to accelerate the construction ofinternal control of listed companies in our country and improve the investmentefficiency.Based on the above background, this paper use free cash flow hypothesis and thefinancing constraints hypothesis, analyze the causes of internal cash flow andinvestment efficiency highly sensitive, at the same time, put internal controlgovernance effects into the analysis framework, on the basis of relevant theories,thoroughly discusses the impact mechanism and governance effect of internal controlon the relationship internal cash flow and inefficient investment of listed companies,Using data of A-share listed companies from2009-2011for empirical testing, resultsshowed that:(1)The higher of the free cash flow, over-investment phenomenon moreserious in company, Effective internal control can mitigate the agency problem, thusinhibition of the over-investment of free cash flow;(2)Internal cash flow more scarce,the under-investment phenomenon is more serious, higher quality of the internalcontrol can help the companies with in-sufficient internal cash flow to mitigateunder-investment problem;(3)Further, internal control of the governance function ofunder-investment is by getting more short-term interest-bearing debt and externalequity financing to achieve, but effective internal control is not beneficial to thecompanies access more long-term interest-bearing debt financing. Based on the aboveconclusions, this paper puts forward some corresponding policies and Suggest ions.The paper for further deepen the theoretical study of internal control andinvestment efficiency, understanding the role of internal control in the company’s capital allocation efficiency. At the same time, to guides our country enterprisespreventing micro-level economy from overheating or overcooling in investmentbehavior has the certain enlightenment significance.