Internal Control Quality,Institutional Investors And Debt Financing Cost

When daily production and operating activities of company require funds and when corporate investment projects face serious shortage of funds,bank loans and issuing bonds are effective methods to raise funds.However,the phenomenon of corporate financial fraud,huge loss in operation and investment,default on bank loans had been repeatedly exposed by news media that caused investors suffered a huge loss,so that seriously affected the confidence of investors in China's capital market.Internal control is one of the important systems of operation and management activities for companies,the providers of funds use the internal control quality to decide whether it is appropriate to invest the company,so it is an important factor for company to obtain funds successfully.Internal control quality represents the guarantee for the reliability of financial information and operation efficiency of enterprises,having natural advantages in protecting investors.At home and abroad,more and more emphasis is putting on strengthening the construction of internal control of companies,improving the efficiency and effectiveness of the company's operation,reducing the information asymmetry,enabling investors to better predict companies' future operation performance and risk status so that they can make the best investment decisions.It is crucial to analyse whether internal control quality have influence on debt financing cost and how it to work,since it is of great significance to improve construction of internal control in our country and to protect the interests of investors,to alleviate financing pressure.Institutional investor is an important external governance mechanism,relevant government departments continued to work out policies and measures to actively guide and support the development of institutional investors,they began to take a positive attitude to participate in capital markets and corporate governance.In the rapid and orderly capital markets abroad,institutional investors have proved to be the main means of external governance of enterprises relative to internal governance,having a great effect on improving the effectiveness of internal controls and business performance.However,the development of institutional investors in China has not yet reached maturity stage,there are still many speculative activities,it still needs further study to examine whether they can improve the level of corporate governance.Different from richly foreign studies on the impact differences of different types of institutional investors,at present,there are few studies on the heterogeneity ofinstitutional investors in our country,but the institutional investors in our country are gradually showing diversified development trend.Besides banks,insurance companies and securities companies,social security funds,securities investment funds and QFII also participate in investing actively and appear to be more and more important in the capital market.Therefore,it is of vital practical significance to study governance difference made by different types of institutional investors.We can utilize influences of institutional investors exerting in improving the governance level of listed companies and internal control quality to reduce debt financing cost.This article takes A-share listed companies in Shanghai and Shenzhen from 2011 to 2015 for the research object.Based on the asymmetric information theory,agency theory,cost-benefit theory and signaling theory,this article uses the multiple regression model to study the relationship between internal control quality,institutional investors and debt financing cost theoretically and empirically.This article is writ based on two questions:firstly,how internal control quality affects debt financing cost of enterprise;secondly,based on the studies of domestic and foreign scholars,the article sorts institutional investors into “pressure-sensitive” and “pressure-resistant”institutional investors on the basis of whether they have potential business relationship with investee,then discusses the differences made by the two types of institutional investors.The result shows that the higher internal control quality of the company can significantly reduces the debt financing cost.Contrasted with the“pressure-sensitive” institutional investors,“pressure-resistant” institutional investors can significantly enhance the reduction of the debt financing cost caused by internal control quality.The internal control quality of listed companies in our country still need to be improved and the development of institutional investors also need strong support and promotion.Through the research in this article,we can offer empirical evidence for the implementation of the internal control system and the development of institutional investors,and it has certain practical significance for improving corporate governance and reducing debt financing cost.Finally,some suggestions are put forward according to the conclusions of this paper:(1)we should improve internal control construction of firms and enhance quality of internal control and information disclosure;(2)we should create a good environment to support the development of institutional investors and optimize the structure of institutional investors.