Research Of Internal Control Quality’s Influence Over Inefficient Investment Behavior

There has been a problem of inefficient investment among China’s listed companies for along time. And the results of previous studies show that agency cost is an important reason whichleading to the occurrence of excessive investment or insufficient investment. Many scholars havepointed out that improving corporate governance can reduce agency costs and restrain theinefficient investment behavior. Because the research on internal control is becoming a hot topicwhich domestic scholars pay more and more attention to, this paper puts internal control, agencycost and efficiency of investment in the same analysis framework for research. In this paper,internal control is seen as a part of the corporate governance mechanism to examine whetherinternal control can suppress the inefficient investment behavior of the listed companies by apath of reducing the two types of agency cost.This paper uses Shanghai A-share listed companies from2010-2012as the study sample.Considering the basis of the five goals of internal control, this article establishes thecomprehensive evaluation system of internal control quality which is composed of17indexesand uses principal component analysis to calculate the quality of each company’s internal controlcomprehensive score, and validates the mediation path of internal control quality’s influenceover inefficient investment behavior.The empirical results demonstrate that improving the quality of internal control caneffectively suppress the occurrence of excessive investment behavior and reduce the two kinds ofagency cost in the listed companies. But internal control quality does not have a significantinhibitory effect on underinvestment behavior. There is a mediation effect in the agency cost. Inthe overinvestment sample, the first type of agency cost (the agency cost between shareholdersand management) has a significant mediation effect. Therefore，a good internal control can curbexcessive investment behavior by cutting down the agency cost that grows out of the interestconflict between shareholders and management, and then enhance the investment efficiency.