The Adoption of China’s Internal Control Framework in Listed Chinese Firms: Determinants and Consequences


Student thesis: Doctoral Thesis

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  • Ying CHEN

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Awarding Institution
Award date2 Sep 2015


In year 2008, China issued its first internal control norms “Basic Standard of Enterprise Internal Control”, which became effective in year 2009 for Chinese listed firms and is known as CSOX in China. The regulation of internal control aims to improve the corporate governance of listed firms and enhance investors’ confidence in China. This dissertation investigates two research questions associated with the internal control practice in China’s listed firms during this infant stage of CSOX. The first research question examines the factors that might explain the variations in the adoption of CSOX among listed Chinese firms. To address this question, I consider both internal and external factors that might impact firms’ level of adoption of internal control as required by CSOX. Specifically, I identify the level of capital expenditure and the need for external financing are the key internal factors, and the monitoring of institutional ownership as the external factor. Based on a sample of 1,517 listed firms in year 2009, I document that firms with a higher level of capital expenditure and stronger need of external financing in the current and following years are more likely to adopt higher level of internal control in response to CSOX. Besides, institutional ownership is also positively associated with the level of CSOX adoption.
The implementation of CSOX may generate potential benefits for firms. The second research question in this dissertation will examine the economic consequences of adopting higher levels of internal control framework. Specifically, I focus on three aspects of economic consequences of implementing internal control. They are investment efficiency, market liquidity and institutional ownership. Based on the adoption of CSOX stage from year 2009 to 2011, we examine the impact of higher levels of internal control on the above three aspects. The empirical results show that firms with higher compliance of internal control improve in investment efficiency and market liquidity. Besides, higher internal control compliance can also attract more institutional investors, especially for those with potentially monitoring institution.