Free Cash Flow, Agency Cost And Internal Control -with The Evaluation Of Economical Efficiency Of Internal Control

The separation of the company management and ownership leads to the agency, which will cause the agency cost. A growing number of studies have shown that agency cost is caused by free cash flow, just as the manager to grab enterprise free cash flow to meet individual self-interest, which we call agency cost. Free cash flow hypothesis, logically based on the above, points out that free cash flow are positively correlated with the agency cost. About how to control this positive relationship, scholars usually pay attention to the role of corporate governance structure, such as the proportion of independent directors, debt ratio, the audit committee system, etc.However, there are still two problems to be solved:firstly, the positive relationship is increasing or decreasing. Secondly, in addition to the corporate governance structure, what does internal control act in inhibition of this positive relationship.Therefore, this paper reviews the positive correlations between free cash flow and the agency cost. Besides, agency cost, in essence, is also a kind of cost. Therefore we divide agency cost into fixed cost, change of normal agent cost and change in excess of agency cost. And we want to know how internal control works as a moderator variable to measure the internal control in the inhibition of free cash flow and agency cost. What's more, the above model can not only reveal the internal control in the inhibition of free cash flow and agency cost positive relations, but also leads to a more important subject other:internal control evaluation.Effectiveness and economical efficiency of internal control evaluation has been hot research topic among scholars. There is direct evaluation and indirect evaluation in common evaluation model, including establishing internal control evaluation system, discussing the effectiveness of internal control, calculating enterprise financing costs or audit evaluation and fees, etc. The traditional internal control evaluation method provides internal control information about their own construction for the financial report users, but its shortcoming is also very obvious. Firstly, it is too subjective, where people often set up evaluation standard, and then calculate scores. Secondly, in most methods internal control will be seen as a black box. They only care about the output quality of the system and ignore the inner running mechanism of the system, which is not beneficial to the continuous improvement of internal control. Thirdly, a lot of the establishment of the internal control system has proved to be in low economical efficiency, which will cut down the value of the enterprise.Internal control evaluation in this article is based on free cash flow hypothesis, and its adjustment for the relationship between free cash flow and agency cost is evaluation principle. Then we use the change of agency costs to describe the internal control economical efficiency.The conclusions of this article are as follows:firstly, the correlation between free cash flow and agency cost is not only positive, but also shows the increasing. Secondly, the internal control for fixed agent cost and the change of excess agency cost has good inhibition. Thirdly, internal control for the inhibition of normal change agent cost effect is not obvious.The contribution of this paper is that the new internal control evaluation method is objective, and can reveal the inner operation mechanism of internal control. At the same time, this method can evaluate the economical efficiency internal control.