Internal Control Deficiency And ICD Remediation With The Cost Of Equity Capital In The Listed Company

Since the release of the Sarbanes-Oxley Act,listed companies have been required to disclose internal control information and to engage certified public accountants to audit and issue internal control reports.It is used by many countries,including China.The internal control information disclosed by listed companies includes deficiencies in the design and operation of the internal control.Some listed companies have internal control deficiencies,which due to internal control program design loopholes and poor internal control environment,or internal control implementation is not in place and other reasons.Internal control deficiency is disclosed to the capital market to pass the signal that ineffective management and investment risk of listed company increases,so that investors ask for a higher risk premium,may affect cost of equity capital.The cost of equity capital is not only the core issue of management's concern,but also the key areas of academic study.Based on the theoretical analysis of the correlation between the internal control deficiencies of listed companies and the cost of equity capital,and the impact of internal control deficiencies remediation on the cost of equity capital,this paper takes the empirical data of A-Share listed companies in Shanghai and Shenzhen from 2013 to 2015 as samples,the influence of the internal control deficiencies on the cost of equity capital is verified by comparing the influence of the internal control deficiencies information disclosure and its remediation on the cost of the equity capital.In addition,the influence of proprietary nature on the correlation between the internal control deficiencies remediation and the cost of equity capital is also is tested.This paper is divided into six parts: the first part is the introduction;the second parts is the literature review,involves ICD definition,classification and economic consequence,and also refer to the cost of equity capital.The third part is the theoretical basis and research hypothesis,including the definition of internal control,internal control deficiencies,internal control deficiency remediation and cost of equity capital,and analysis of cybernetics,effective market hypothesis,asymmetric information theory,signaling theory and principal-agent theory.Based on these theories,this paper puts forward the main hypothesis of this paper.The fourth part introduces the empirical design in this paper.In the fifth chapter,through the establishment of multiple linear regression models,the influence of internal control deficiencies on equity capital cost,the impact of the ICD remediation on the cost of equity capital and the nature of the enterprise on the relationship between ICD remediation and cost of equity capital are tested and analyzed.Chapter six is the conclusion of this paper,summarizes the conclusion,limitations and future direction of further research.The main conclusions of this paper include:(1)Empirical evidence shows that the disclosure of ICD will lead to an increase in the cost of equity capital of listed companies.The disclosure of ICD transmits the information of invalid internal control to investors.Investors of capital market ask a higher risk rate of return,which lead cost of equity capital rise.(2)Empirical evidence shows that ICD remediation can reduce the cost of equity capital of listed companies.ICD remediation transmits the information to capital market that the quality of internal control has been improved,which also partly reduces the asymmetry of information.Investors of capital market ask a lower risk rate of return,which lead cost of equity capital decline.(3)Empirical evidence suggests that,compared to non-state-owned listed companies,the remediation of ICDs in state-owned listed companies can significantly reduce the cost of equity capital.Non-state-owned listed companies,especially private enterprises have some problems in corporation governance,such as sole majority shareholder,major shareholder-controlling and family-run,which frequently lead internal control invalid.Remediation of ICDs of non-state-owned listed companies hardly gains approval from capital market.Compared with non-state-owned listed companies,state-owned listed companies easily gain approval,and the cost of equity capital reduction caused by repair of ICDs is more remarkable.