Abstract
State-owned enterprises (SOEs) play a crucial role in China's economy. Those directly controlled by the central government (CSOEs) take leading positions almost in all industries in China. In this paper, we analyse the impacts of internal control quality of CSOEs on related party transactions and corporate value of CSOEs after the Chinese government introduced regulatory changes and the split share structure reform. Current literature offers little empirical evidence in this area. The primary information collected from 167 questionnaires responded by 22 CSOEs is analysed using structural equation models. We find that internal controls of a higher quality reduce unfair related party transactions for private benefits at the cost of corporate value and hence increase the corporate value of CSOEs. However, the overall perception of the internal control quality of CSOEs is not satisfactory with a mean of 5.3174 based on a seven-point Likert scale. This indicates that effective implementation of internal control is critical for CSOEs after setting up regulations and systems.
Highlights
The internal control of a good quality can reduce accrual and real earnings management and firms that disclose auditor's internal control report have lower level of earnings management (Fang and Jin 2011)
There is a recent surge of academic interest in internal control quality and its effects on different types of organizations
Causes and consequences of internal control problems have been analysed for non-profit organizations (Petrovits et al 2011)
Summary
The internal control of a good quality can reduce accrual and real earnings management and firms that disclose auditor's internal control report have lower level of earnings management (Fang and Jin 2011). We know little from the previous literature whether the quality of internal controls has any impact on related party transactions and corporate value. Such research question is of a great importance in the Chinese context. Internal control systems have been established in most listed companies and some unlisted companies in China. Theoretical and empirical studies on the quality of internal controls in the Chinese context emerge. Due to the complicated situation and information unavailability, little direct evidence is reported for the effects of internal control on corporate value (Lin et al 2007)
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