Mandated Disclosure Of Internal Control Deficiencies On Cost Of Equity

Internal control is an important part of corporate governance system, in order to perfect capital market and improvement the governance level of listed companies; the regulators released a series of standards and guides towards internal control, which turned the voluntary disclosure to mandate disclosure. These rules provide specific guidance for the promotion of internal control quality of listed companies on the one hand, and make market participants more informed on the other hand.According to the principal-agent theory and signaling theory, effective internal control will decrease accounting mistakes and reduce agent cost, and then improve the accrual quality and management efficiency, these are signals transmit to the market which will affect the valuation and decision process of investors, and move forward to influence the cost of equity. This paper empirically analyses the relationship between internal control efficiency and cost of equity.This paper chooses listed companies in2011as sample; analyzes the impact of mandated disclosure of internal control deficiencies on cost of equity. According to the frame of Basic Rules of Corporate Internal Control, the paper labeled the ICD as the three aspects of normal deficiencies, important deficiencies and serious deficiencies. This paper reflects the quality of internal control from the amount and type of ICD.