At present, the main ways of protecting the interests of creditors include adjusting the new debt scale, reducing the interest rate and adjusting the debt capital cost. In this paper, from a new perspective of the principal-agent, this article tries to explore whether the internal control can protect the interests of the creditors. Through the study, we found that the higher the quality of internal control of listed companies, the less the occupied money by assets substitution of controlling shareholders.
For a long time, the protection of rights and interests plays an important role in multiple disciplines, such as economics, law, accounting and other research priorities. And the protection of rights and interests focuses on investor protection. In fact, the equity structure is more unique in China, law for protecting investors is not perfect, the corporate bond market is under-developed and the state-owned commercial banks are the largest creditors of listed companies in China [
Jensen and Meckling (1976) proposed the “asset substitution effect”, namely, In the case of high debt levels, shareholders and managers have strong incentives to invest in projects with high risk [
Smith and Warner (1979) designed questionnaire according to restrictive clauses in debt contracts and get further conclusion that internal staff can infringe the legitimate rights of creditors by the following four ways: dividend policy, debt dilution, asset substitution and under-investment [
Doyle (2009) concentrated on information symmetry and suggested that internal control can protect the interests of creditors by improving the accounting quality of enterprises, reducing the information asymmetry between internal and external and helping external investors make better decisions [
Li and Yang (2013) found that creditors will perceive signal of protection and then willing to ease the debt contract conditions when the level of quality of internal control is relatively high [
In the principal-agent relationship of managers/shareholders and creditors, Jiang and Shen (2005) think that the controlling shareholders violate the interests of the creditors by the way of asset-substitution from the debt agency-cost perspective [
The higher the quality of internal control of listed companies, the less money the controlling shareholders occupied by the way of asset substitution behavior.
Based on the above analysis and assumption, the detail of the dependent variable, independent variable and control variables in this article are as follows.
“Tunneling” (TUN). Controlling shareholder “tunneling” the funds of listed companies usually by the way that occupied receivables from the related party transactions or other receivables from “temporary loan” [
Quality of internal control (LNICQ). There are three ways to measure this indicator. Firstly, based on the disclosed information of internal control to determine indicators. Secondly, by setting a questionnaire to evaluate the quality of internal control. Lastly, to construct an internal control index which evaluate the quality of internal control by using the weighted method. This article used the third method. The quality of internal control in this paper was constructed by the jointly research group of internal control index by Sun Yat-sen University and Shenzhen DIB Enterprise Risk Management Co., Ltd. The database has been widely recognized.
Guarantee capacity (ASSU). ASSU is measured by the ratio of the net fixed assets, the net inventory to the total assets at the end of the year. As we all know, the debtor’s ability to guarantee the important reasons is the impact of debt size, duration, cost, etc.
The company’s growth (GROWTH). Chen (2009) showed that the high-growth companies presence under- investment behavior, low growth companies exist asset substitution behavior. Listed companies under different growth through different ways to “tunneling” the interests of creditors [
Financial risk level (LEV). Under the condition of high financial risk, the creditor is difficult to obtain stable interest, even the principal will not be repaid. In this paper, measured by asset-liability ratio.
The net cash flow of each asset (CASHPS). Cash flow is an important guarantee to ensure that creditors can rapid recovery the principal, in this paper, CASHPS measured by the end of net cash flow to total assets ratio.
The nature of the first major shareholder (SHAERC). Yang Deming, Feng Xiao (2007, 2008) their empirical research shows that, the internal control of high quality enterprise can get more money, but this phenomenon exists only in state-owned-enterprises [
The data used in this paper included all of the A-share companies which were listed in the main board in China from 2011 to 2013. These years that release the internal control self-assessment report. The dependent variable and the data come from the database GTA CSMAR, the disclosure quality data of internal control information comes from DIB internal control and risk management database, and the data statistics and analysis is proceed by Excel, STATA, SPSS. And in accordance with the following methods of screening samples, removing the financial and insurance public companies; removing the sample companies which their variable data is incomplete or missing values; then continuous variables around 2% were handled by Winsorize to eliminate the influence of extreme values. A total of 3537 observations were obtained after filtering and sorting.
Correlation coefficient of the relationship between each variable matrix as shown in the
Variables | Obs. | Min | Max | Mean | Std. dev |
---|---|---|---|---|---|
TUN | 3537 | 0.000 | 0.118 | 0.019 | 0.025 |
LNICQ | 3537 | 6.239 | 6.808 | 6.521 | 0.115 |
ASSU | 3537 | 0.069 | 0.824 | 0.447 | 0.187 |
GROWTH | 3537 | −0.976 | 7.927 | 0.270 | 1.318 |
LEV | 3537 | 0.157 | 0.935 | 0.554 | 0.188 |
CASHPS | 3537 | 0.011 | 0.423 | 0.130 | 0.093 |
SHAREC | 3537 | 0.000 | 1.000 | 0.060 | 0.243 |
Variables | Quality | N | Mean | Std. dev | F | Sig. | t | Sig. |
---|---|---|---|---|---|---|---|---|
TUN | 1 | 1761 | 0.018 | 0.023 | 32.584 | 0.000*** | −3.419 | 0.001*** |
0 | 1776 | 0.020 | 0.027 | |||||
LNICQ | 1 | 1761 | 6.605 | 0.071 | 146.443 | 0.000*** | 63.351 | 0.000*** |
0 | 1776 | 6.437 | 0.086 | |||||
ASSU | 1 | 1761 | 0.446 | 0.184 | 0.685 | 0.408 | −0.408 | 0.683 |
0 | 1776 | 0.449 | 0.189 | |||||
GROWTH | 1 | 1761 | 0.316 | 1.339 | 0.202 | 0.653 | 2.030 | 0.042** |
0 | 1776 | 0.226 | 1.296 | |||||
LEV | 1 | 1761 | 0.562 | 0.181 | 11.868 | 0.001*** | 2.427 | 0.015** |
0 | 1776 | 0.547 | 0.196 | |||||
CASHPS | 1 | 1761 | 0.136 | 0.093 | 0.921 | 0.337 | 3.734 | 0.000*** |
0 | 1776 | 0.125 | 0.091 | |||||
SHAREC | 1 | 1761 | 0.052 | 0.221 | 29.607 | 0.000*** | −2.710 | 0.007** |
0 | 1776 | 0.074 | 0.261 |
Note. N = 3537; *p < 0.05; **p < 0.01; ***p< 0.001.
Variables | TUN | LNICQ | ASSU | GROWTH | LEV | CASHPS | SHAREC |
---|---|---|---|---|---|---|---|
TUN | 1.000 | ||||||
LNICQ | −0.065** | 1.000 | |||||
ASSU | −0.155** | −0.014 | 1.000 | ||||
GROWTH | 0.071** | 0.037* | −0.015 | 1.000 | |||
LEV | 0.145** | −0.009 | 0.267** | 0.072** | 1.000 | ||
CASHPS | −0.010 | 0.096** | −0.405** | −0.006 | −0.318** | 1.000 | |
SHAREC | 0.053** | −0.058** | 0.014 | 0.033* | 0.052** | −0.016 | 1.000 |
Note. N = 3537; *p < 0.05; **p < 0.01; ***p < 0.001.
The empirical results show that controlling shareholders often “tunneling” the benefit of creditors by the way of asset substitution behavior, specific performance of possession of the assets. But the high quality of internal control can alleviate this encroachment. It turned out to be that the internal control has the capability to protect the creditors.
TUN: Results of multiple regression analysis | |||
---|---|---|---|
Variables | Coef. | T | Sig. |
TUN | −0.014 | −3.866 | 0.000*** |
LNICQ | −0.029 | −12.161 | 0.000*** |
ASSU | 0.001 | 3.407 | 0.001*** |
GROWTH | 0.025 | 10.695 | 0.000*** |
LEV | −0.009 | −1.755 | 0.079* |
CASHPS | 0.004 | 2.497 | 0.013** |
SHAREC | 0.108 | 4.695 | 0.000*** |
Adjusted R² | 0.070 | F | 45.268 |
Note: N = 3537; *p < 0.05; **p < 0.01; ***p < 0.001.
The protection of creditors also affected by other factors, such as the net cash flow per share (CASHPS), the ability to grow (GROWTH) and other business management indicators. The profitability and growth of listed companies are guarantees for the creditors. Moreover, audit opinion, as another independent factor, it seems to be more trustworthiness, and it can improve the reliability of financial information. At last, the listed companies which issued standard audit opinions would protect the interests of creditors.
The above study and its conclusions, breaking the previous study that the internal control of investor protection focused mostly on the equity investors, selected an innovative angle of creditors, which enriched the research in this field.
Above results revealed that, in currently, we should not only strengthen the protection of minority shareholders of listed corporations, but also pay more attention to protect creditors of those companies. At present, China's listed companies to establish a sound internal control system of work is in full swing, which is both bigger and stronger foundation to promote the company, but also for the stable development of the capital markets provide an important safeguard. This study shows that improving the quality of internal control can effectively protect the interests of creditors. In order to better promote the role of the internal control and reflect the value, the paper makes two suggestions.
Recommended the introduction of laws and regulations clearly to constraint listed companies of disclosing internal control behavior. Government departments and regulatory bodies have introduced appropriate laws and regulations, to require listed companies to establish a sound internal control system, and guide the implementation of the internal control system of listed companies. But the lack of clearly defined if the internal control of listed companies exist a defect or other problem, there are no appropriate laws and regulations shall be punished. In response to this phenomenon, we recommend our reference 906 US SOX Act, the introduction of appropriate laws and regulations on concealed internal control deficiencies, the effectiveness of internal control false disclosure of listed companies be severely punished, so as to promote the healthy development of China’s capital market.
Established industry benchmark of internal control. Regulatory agencies can promote the norms of internal control combined with the implementation plan. Then selecting the enterprises of high quality of internal control as the industry benchmark, so that other listed companies can establish their internal control system within the guidance of this industry. The organization of industry experts regularly evaluate and improve internal control standards, so that to provide some reference for the construction of the listed company’s internal control system.