Abstract
The mandatory internal control (ICFR) audit system, which has been implemented since 2012, is an important institutional innovation in the capital market and has a close relationship with the internal management of enterprises, while its relationship with corporate Risk-taking ability has received less attention from scholars. This paper uses the data of listed companies in Shanghai and Shenzhen from 2009 to 2019, and utilizes the Notice on the Implementation of Enterprise Internal Control Regulation System in 2012 for Main Board Listed Companies in Categories and Batches issued in 2012 as a quasi-natural experiment to test the impact of mandatory ICFR auditing on enterprise Risk-taking ability through multiple time point Differences-in-Differences method. It is found that mandatory ICFR audits significantly improve firms' Risk-taking ability, and this positive effect is more pronounced for non-state-owned enterprises with higher information transparency and a higher degree of separation of powers. The paper further investigates the mechanism of financing constraints in which the results show that mandatory ICFR auditing enhances firms' Risk-taking ability by reducing the degree to which firms are subject to financing constraints.
Highlights
Internal control (ICFR) auditing is an important component of business management that can affect all aspects of business performance, information quality, and agency costs
This paper conducts an empirical test of multi-temporal DID on the full sample, on the basis of which the companies are classified heterogeneously into state-owned enterprises and nonstate-owned enterprises according to the nature of ownership, into enterprises with high information transparency and enterprises with low information transparency according to the auditor's concern, and into enterprises with high separation of two powers and enterprises with enterprises with lower separation of powers
We use the Notice on the Implementation of Enterprise Internal Control Regulation System for Main Board Listed Companies in 2012 by Classification and Batch as a quasi-natural experiment, and take A-share listed companies in Shanghai and Shenzhen from 2009 to 2019 as the research sample, and use the multi-temporal double difference method to test whether mandatory ICFR auditing has an enhancement effect
Summary
Internal control (ICFR) auditing is an important component of business management that can affect all aspects of business performance, information quality, and agency costs. In terms of information quality, ICFR auditing can have a significant effect on the control of financial statement quality, which affects investors' investment decisions in the firm (Caramanis & Lennox, 2008; Krishnan, 2003; Cheng et al, 2013). For modern firms with agency cost problems due to the separation of powers, the effectiveness of ICFR auditing affects the level of losses arising from agency problems (Doyle et al, 2007; Zhang, 2007; Engel et al, 2006). ICFR auditing is one of the most important tools to assess the effectiveness of internal control, but it has been controversial, especially as to whether ICFR auditing should be mandatory for enterprises. The focus of debate is on how mandatory ICFR auditing affects a company's risk-bearing capacity
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