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Internal Control, Corporate Life Cycle, and Firm Performance

Haiyan Zhou

Hanwen Chen

Zhirong Cheng

The Political Economy of Chinese Finance

ISBN: 978-1-78560-958-9, eISBN: 978-1-78560-957-2

Publication date: 12 November 2016

Abstract

Purpose

In this paper, we investigate whether internal control and whether corporate life cycle would affect firm performance in the emerging markets of China.

Methodology/approach

We use Chen, Dong, Han, and Zhou’s (2013) internal control index on the effectiveness of internal control and Dickinson’s (2011) definition on firm life cycle. We use multivariate regression analysis.

Findings

We find that the internal control improves corporate performance. When dividing firm life cycle into five stages: introduction, growth, mature, shake-out and decline, we find that the impacts of internal control on firm performance vary with different stages. The positive impact of internal control on firm performance is more significant in maturity and shake-out stages than other stages.

Research limitations/implications

Our findings would have implications for the regulators and policy makers with regards to the importance of internal control in corporate governance and the effectiveness of implementing standards and guidelines on internal control in public firms.

Practical implications

In addition, our findings on the various roles of internal control at different stages of firm life cycle would help managers and board of directors find more focus in risk management and board monitoring, respectively.

Originality/value

Although the prior literature have examined the link between internal control, information quality and cost of equity capital (Ashbaugh-Skaife, Collins, Kinney, & LaFond, 2009; Ogneva, Subramanyam, & Raghunandan, 2007), our study would be the first attempt to investigate the link between internal control and firm performance during different stages of firm life cycles.

Keywords

Acknowledgements

Acknowledgments

Hanwen Chen would like to acknowledge the financial support from the National Natural Science Foundation (Project No. 71332008), and the Key Research Base Fund for Humanities and Social Sciences from Ministry of Education of China (Project No. 10JJD630003).

Citation

Zhou, H., Chen, H. and Cheng, Z. (2016), "Internal Control, Corporate Life Cycle, and Firm Performance", The Political Economy of Chinese Finance (International Finance Review, Vol. 17), Emerald Group Publishing Limited, Leeds, pp. 189-209. https://doi.org/10.1108/S1569-376720160000017013

Publisher

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Emerald Group Publishing Limited