This paper studies whether economic policy uncertainty (EPU) influences internal control (IC). Exploiting EPU as an exogenous shock and using unique internal control index data at the firm level from China, we can make causal inferences about the EPU effect on IC, and provide new insight into firms’ sustainability. Our results show that firms tend to cope with higher EPU by improving IC, indicating their efforts to ensure sustainability development. We also find that this trend is intensified for firms localized in regions with a lower marketization degree, state-owned firms, or firms with fewer analysts following. Further analyses show that EPU significantly reduces the internal control auditing fees, hence backing up the association between EPU and IC. Unlike the previous literature, this paper shows the important role of internal control for firms in coping with EPU, which is of crucial significance to how firms seek to adhere to sustainable development and how economic policy works best.
This article first analyses the impact of independent director interlocks on firms' earnings persistence in China, an emerging market from 2007 to 2017. Using the independent director network data and the unique internal control index, this article investigates the association between independent director interlocks and earnings persistence, and the roles of firms' outside director interlocks and firms' inside internal control playing in earnings persistence. Our results reveal a significant and positive association between independent director interlocks and earnings persistence, and in the context, there is a clear mediation effect of internal control in relationship of independent director interlocks and earnings persistence. Further analyses on the scope and stability of independent director interlocks effects show that independent director interlocks can both improve accrual earnings persistence and cash flow persistence. Meanwhile, the effect of independent director interlocks differentiates under the influence of firms' strategy, only playing a significant role in defensive ones. Moreover, we find that independent director interlocks can relieve the 'accrual anomalies' in the securities market. Our results are robust to the various measure of earnings persistence and alternative methodological techniques.
This study investigates whether signing auditors with foreign experience influence debt financing costs. Using a sample of Chinese listed firms for the period of 2001–2016, this study hand-collects the information of signing auditors’ foreign experience and empirically examines the relationship between signing auditors’ foreign experience and debt financing costs. The empirical results show that signing auditors’ foreign experience is significantly and negatively correlated with debt financing costs, suggesting that signing auditors’ foreign experience improves audit quality, reduces information risk and thereby lowers the cost of debt financing. Further analyses show that the negative effect of signing auditors’ foreign experience on the cost of debt financing is more pronounced in audit firms without industry expertise, suggesting that audit firm industry expertise mitigates the negative relationship between signing auditors’ foreign experience and debt financing costs. These results imply that signing auditors who have foreign experience could serve a significant role in debt financing, which would strengthen firms’ sustainability.
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