Research About The Impact Of Internal Control Quality On Enterprise Value

With the development of enterprises, ownership and management rights are gradually separated. In order to monitor the manager to perform the obligations, the internal control mechanism is designed, and continuously developing. As an important part of corporate governance mechanism, the goal of the internal control mechanism is to improve the enterprises’operation efficiency and effectiveness. Then, it can really realize the goal of maximizing enterprise value. Since the internal control plays such an important role in creating the enterprise value, the government and enterprise owner pay great attention to the construction and implementation of the internal control system. Due to the problem of internal control, lots of enterprises’shares tumbled, and failed to pass the IPO auditing. For example,"the Shuanghui event" and "Green Earth’s IPO lies". They are warning for the enterprise. Don’t let the internal vulnerabilities destroy an enterprise. China’s capital market is increasingly developed. The number of listed companies and investors are growing. Listed companies should learn from the lessons of the Green Earth. In the company, they should create a good environment, timely assessing operation risk, improving internal control activities, establishing good communication mechanism, and improving the internal supervision system.The enterprise scale is expanding. Business activities and transactions are continuingly rich and complex. In this condition, it is of great importance for an enterprise to improve the reliability of internal control system. The state-owned banks’risk control system and internal control mechanism are perfect. In the market, commercial banks should learning from them. Risk control system is used to guarantee the enterprise sustained development. An enterprise’ ability of resisting risk and creating value depends largely on the effectiveness of the internal control designing and implementing.Based on the internal control of listed companies, the paper calculates internal control index (ICI) by the method of DIB ICI. The ICI is used to measure the listed companies’internal control quality. Then, this paper analyzes the relationship among ICI, agency cost and enterprise value. First, it analyzes the relevant theory. According to the analysis results, it proposes three assumptions and establishes three test models. Last, the results of empirical analysis are used to demonstrate the hypothesis.The empirical studies show that ICI is negatively related to the agency cost, and positively related to the enterprise value. The agency cost plays an intermediary role between the internal control system and enterprise value. When building internal control system, the managers need to judge whether it can alleviate the agency conflicts. By improving agent efficiency, the internal control system creates value.This paper is divided into five chapters, each chapter is as follows.Chapter1IntroductionThis chapter first introduces the background and significance of this paper, followed the ideas, methods and possible innovation points of research are described. In the significance part, this chapter points out the theory anchor by learning from previous theoretical results. Meanwhile, in order to make research has practical significance this chapter analyzes the listed companies’internal control situation. Then, it calls for building value-oriented internal control. In the research content part, it describes the overall framework. In the method part, it specifically explains the empirical test ideas. This chapter use detailed technology roadmap to make it clearer.Chapter2Literature Review and Theoretical basisFirstly, the chapter reviews the literature both foreign and domestic about "internal control and agency cost". The current literature mainly concentrates on the internal control information disclosure. It is an effective corporate governance mechanism. The higher the information transparency, the more it can reduce agency conflicts. Thereby, inhibiting the agency cost.Secondly, the chapter reviews the literature both foreign and domestic about "agency cost and enterprise value". The agency problem is the key to improve corporate governance and enhance enterprise value. Lots of researches have fully proved that the agency cost destroys enterprise value. The reasonable ownership structure, incentive mechanism and ownership configuration can reduce agency conflicts and enhance corporate value.Thirdly, the chapter reviews the literature both foreign and domestic about "internal control and enterprise value". Most foreign scholars tend to research the problems of internal control deficiencies and information disclosure. The domestic scholars have also done lots of qualitative analysis or quantitative empirical research. They mainly study the following aspects, the value-creating goal, process, factors and value-chain management.Finally, this chapter describes the theoretical basis:control theory, agency theory and the theory of enterprise value. According to the control theory, an enterprise belongs to a control system. The internal control is a kind of control mechanism. The internal control system and enterprise value theory develop together, then promoting mutually. The principal-agent theory connect them closely.Chapter3Theoretical Analysis of the Impact of Internal Control Quality on Enterprise ValueThis chapter first discusses how to accurately measure the quality of internal control and corporate value. Then, according to the theoretical basis, it points out how internal control quality affects corporate value.The enterprises’goal is keeping continuous profitability and maximizing enterprise value. Internal control is designed to achieve this goal. It also promotes the development of the enterprise value theory. On the one hand, internal control helps achieve sustained value creation. On the other hand, the enterprise is constructing the dynamic internal control system. Accompanied by the development of agency theory, it produces internal control. The agency problems caused by incomplete agent contract are its theoretical basis. The mature internal control system should reach the following standard. The higher the internal control quality, the lower the agency costs, and the greater the enterprise value. As value creation activities, the internal control improves corporate value by mitigating agency conflicts.Chapter4Empirical Research of the Impact of Internal Control Quality on Enterprise ValueThis chapter first carries out the following hypothesis. The ICI is positively correlated with enterprise value, negatively correlated with agency cost. The agency cost has mediating effect among them. Secondly, it defines the experimental variables and control variables. The former include enterprise value, internal control index and agency cost’alternative variable. The latter include shareholding structure, capital structure, firm size and growth variables. Then, it constructs three models to test the hypothesis. The first model is used to test the relevance between ICI and enterprise value. The second model is used to test the relevance between ICI and agency cost. These three models are used together to test agency cost’mediating effect. Finally, it describes the empirical sample and data.Then it examines the assumptions in order. The first empirical result shows that "the higher the ICI, the greater the enterprise value", which is consistent with the theoretical expectations. The second empirical result shows that "the higher the ICI, the higher the agency efficiency". The higher efficiency means agency costs is lower. This indirectly verifies the second assumption. Finally, compared with the first model, the third model’s ICI coefficient has a significant decline. The conclusion is that "agency cost plays an intermediary role when internal control creating enterprise value". In the empirical test, this chapter uses descriptive statistic, correlation analysis and regression analysis. The robustness test has been carried out to verify the conclusion reliability.Chapter5Conclusions and ImplicationsFirstly, based on theoretical analysis and empirical results, the chapter reaches the final conclusions of this paper. Secondly, based on the final conclusion of this paper, this chapter makes the policy recommendations as follow.①The regulatory authorities should unify internal control information disclosure format.②The government departments and regulatory authorities should strengthen the legal system construction of internal control and the penalties for concealment or false information disclosure.③The listed companies should build appropriate internal control system according to their own business characteristics. Meanwhile, promoting information system construction, it can ensure the system being effectively carried out.④It is necessary to build a dynamic monitoring mechanism, reducing the uncertainty of execution. Finally, the chapter points out some limitations and ideas for further improvements.The main contributions of this paper are following. (1) Compared with previous internal control index measurement methods, this paper uses DIB method. It is designed according to the achieving degree of the five goals. It is comprehensive, scientific and objective to measure internal control quality.(2) The empirical results prove the mediating effect of agency cost. It enriches the theoretical study of internal control and value creation.