Empirical Research On Internal Control Quality And Cost Of Equity Of Public Companies

Internal control is an important aspect of corporate governance, with thedevelopment of China’s capital market, investors and regulators are paying moreattention to the internal control of public companies. Based on the principal-agenttheory and the signaling theory, highly qualified internal control can reduce theinformation risk of financial statements, improve the management of the enterpriseand guarantee the long-term development. Investors consider internal control qualityas a factor in evaluating a company’s performance, and then make investmentdecisions, thus affecting the cost of equity of public companies. According to theefficient markets hypothesis, the capital market can react timely and accurately to thequality of the internal control. To ensure the effective development of the capitalmarket, protect the interests of investors, and promote the operation public companies,regulators launched a series of regulations, strengthened internal control constructionand disclose level.In China’s capital market, the effect of improving the quality of internal controlof public companies still needs to be verified. Research on the relationship betweeninternal control quality and cost of capital can help to better understand the influencemechanism of internal control in the capital market and further strengthen the internalcontrol specification. In this paper, the author used relevant theories to analyze thefactors affecting the quality of internal control and the relationship between internalcontrol quality and cost of equity. And then used public companies from2009to2012 as samples, performed empirical research on the relationship between quality ofinternal control and cost of equity. During the study, quality of internal control isdivided into five internal control index according to the internal control objective toanalyze the effect of each index. Through this study, we concludes that as thestrategic objectives, operating objectives, financial reporting objectives andcompliance objectives performs better, the cost of equity will be lower. This studydid not find a linear relationship between the asset security objectives and cost ofequity capital. Overall, strengthened internal control helps companies to lower cost offinancing.This paper is divided into six parts, and the first part is an introduction. This partdescribes the background, significance, a brief content and framework of this paper,as well as the innovation. The second part summarized the relevant researches oninternal controls and the cost of equity of other scholars, to determine the researchdirection and method. In part three the author used the internal control theory, agencytheory and signaling theory to point out the relationship between internal controlquality and cost of equity and proposed the hypothesis of this paper. The fourth partof this article established five indexes to measure the quality of internal control, andselect the appropriate control variables, and built the regression model in this paper.The fifth section performed descriptive statistical analysis, correlation analysis andregression analysis of the variables in our model to find out the relationship betweeninternal control and cost of equity, then used robustness test to determine thereliability of the study. The sixth part drew the final conclusions of the study,proposed appropriate policy recommendations and prospects for future research.