Internal Control,Bank Connection And Debt Financing Cost

Small and medium-sized enterprises play a vital role in China's economic transformation,but debt financing constraints have been limiting their development.Lack of financing channels for SMEs,bank credit is the main way of their external financing.However,Banks are usually skeptical of the financial data disclosed by SMEs,which is due to the small scale and imperfect internal control of them.There is a serious information asymmetry between the two sides of debt contract.Banks set unreasonable credit rating on SMEs in order to strengthen risk control,leading to the financing difficulties and high cost for SMEs.Therefore,in order to solve the financing problem,SMEs should firstly raise the level of internal control to reduce the uncertainty of accounting information and alleviate the crisis of confidence.Secondly,SMEs can introduce the relationship mechanism to promote communication with banks and obtain credit resources.The relationship mechanism discussed in this paper is mainly bank connection,and it is divided into two aspects: bank personnel connection and bank equity connection.The former is that the executive hired in the enterprise was the manager of the bank.The latter is that the bank and the firm hold Shares of each other.The cost of financing which enterprises are most concerned about in the debt contract is chosen as the research perspective to explore the common influence of the internal control and bank connection on the debt financing cost in order to enrich the research on economic consequences of internal control and bank connection as well as provide some practical recommendations on reducing financing cost for SMEs.The listed companies of Shenzhen Small and Medium Board in 2012-2015 is used as the research data to discuss the influence of internal control and bank connection on debt financing cost by T test of group mean,full-sample regression analysis and sub-sample regression analysis.Firstly,the whole sample is divided into high and low level of internal control groups according to the median of internal control quality.And then the whole sample is also divided into groups of bank and non-bank connection.It is concluded that the internal control and bank connection both can reduce the debt financing cost of the enterprise by comparing the difference of debt financing cost between the internal controlgroups and the difference of the debt financing cost between the bank and non-bank connection groups.And the same conclusion is obtained through the regression test of the whole sample.Secondly,regression tests are conducted on the internal control sub-sample and the bank connection sub-sample.By comparing the difference of the bank connection coefficients and their significance levels between the internal control groups,and the internal control quality coefficients and their significance levels between the bank connection groups,we draw that the introduction of bank connection also do nothing when the level of internal control is poor because the bank is rational and only under the premise of perfect internal control of the enterprise can bank connection demonstrate the effect of reducing the cost of debt financing.The possible contributions of this paper are as follows:(1)The existing research on the definition of bank connection was mostly based on a single dimension.The bank connection is expanded into bank personnel connection and bank equity connection in this paper by synthesizing related articles to examine its role in debt financing cost more accurately and comprehensively.(2)With regard to the impact of internal control on debt financing cost,scholars less considered the interaction of external relation mechanisms.Bank connection is chosen as the research perspective in this paper,which enriches the literature on the effect of internal control and external relations on debt contract.