Whether Internal Control Reduce Corporate Risk-taking

The enterprise internal control basic norms was put into effect on January 1st.2009 in China, followed by the issue of supporting guidelines for enterprise internal control. Both of the two documents are of great importance to consummate an internal control evaluation system and improve internal control disclosure quality. In this context, first, we take an A-share listed company from 2003 to 2014 as an example, to see if the internal control quality has been improved after the norm was established. Secondly, we study the relationship between internal control and risk-taking during the time period from 2009 to 2014 making use of six indices including cash and cash-equivalents, capital investment, research and development investment, cash and stock volatility as well as an aggregative indicator which is comprised of the five indicators above calculated by principal component analysis. At last we take the ownership character and technology into consideration to see if the two characteristics create difference in the relation between risk-taking and internal control. Empirical results show that, the internal control quality was highly improved after the norm was established. There is a strong positive correlation between internal control quality and risk-taking. Compared with a non-state-own company, the state-own company shows a weaker relation between risk-taking and internal control quality. But in the high-tech industrial sector, the relation is not obvious.This paper studies for the first time the relationship between internal control and risk-taking behavior through the use of six indices including cash and cash-equivalents, capital investment, research and development investment, cash and stock volatility as well as a comprehensive indicator which is comprised of the five indicators above by principal component analysis. Also, this paper explores which indicator is more appropriate to measure the risk-taking behavior of a company.