Research On The Relationship Between Disclosure Quality Of Internal Control And The Cost Of Equity Capital

As the connection of listed companies and investors in the capital market, information is very important. Investors want to use the information to decide whether to invest, and listed companies will disclose positive information to attract the investors. Especially in recent years, market participants pay attention to the disclosure of internal control. From the SOX to 《The basic norms of the internal control》, which suggests many countries are trying to explore.In recent years,the listed companies’attention to the cost of capital is rising.The cost of capital plays an important role in the budget, investing and financing decisions, evaluation and so on. It is also the important basis of capital structure. The cost of equity capital is an important part of the capital cost, which directly affects the cost of capital. And the cost of equity capital is determined by the degree of the risk of the investment projects. So, the managers should reduce the expected risk of the investment projects of the investors in order to reduce the company’s cost of equity capital and create more value for the enterprise.However, does it work by strengthening enterprise to disclose the internal control? Can investors reduce the predict risk of the future and the cost of equity capital? I will discuss these problems along these lines.Firstly,I reviewed the relevant research results of the domestic and the abroad. Socondly, I stated the principal-agent theory, asymmetric information theory and signaling theory., and analysed how the disclosure quality of internal control affect the cost of equity capital, and put forward the research hypothesis. Thirdly, I designed the model.Before the designing, I explained the connotation of various variable. Fourthly, this paper empirically tested the relationship between the disclosure quality of internal control and the cost of equity capital from the direct and indirect.The cost of equity capital is the dependent variable and the disclosure quality of internal control is independent variables. Profitability, growth, size, financial risk, asset turnover, corporate governance, industry characteristics, book value ratio and state-owned shares are control variables.We have found that the disclosure quality of internal control is significantly negative correlation with the cost of equity capital, and is significantly negative related with the stock risk, and significant positive correlation with the stock liquidity. In order to enhance the robustness of the conclusion,we also has carried on the robustness test, test results are consistent with the master test.Based on these findings, I put forward several recommendations from the listed companies and regulators.Firstly, The companies should establish a system of internal control, which can really work. In addition, the listed companies should disclose the annual report and internal control self-assessment report timely., and hire the auditors to issue the internal control verification report.Thirdly, they should attach great importance to the construction of internal control culture. The listed companies should improve the disclosure quality of internal control to reduce the cost of equity capital.At the same time, the independent and impartial authority should establish a set of authoritative index to evaluate the disclosure quality of the internal control of listed companies, promote the establishment of the internal control verification system, accelerate the construction of internal control auditing standards and enhance investor education.In a word, they should transmit the disclosure information of internal control to the investors timely and accurately through mandatory disclosure requirements to reduce the cost of equity capital and improve the efficiency of the securities market.