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The influence of qualified foreign institutional investors on internal control quality: evidence from China

The influence of qualified foreign institutional investors on internal control quality: evidence from China
The influence of qualified foreign institutional investors on internal control quality: evidence from China
This study aims to investigate whether qualified foreign institutional investors (QFIIs) improve companies’ internal control quality to mitigate information asymmetry. By analysing a sample of 22,310 firm-year observations from Chinese listed companies between 2005 and 2017, we found that companies with QFIIs exhibit higher internal control quality and fewer internal control deficiencies. In particular, higher QFII ownership is associated with higher quality of internal control. Interestingly, QFIIs from high-governance-quality countries are more likely to improve the internal control system of their investee companies. Finally, the improvement in internal control quality attributed to QFIIs leads to better operating performance. Our results are robust to alternative measures of QFIIs, alternative proxies for internal control quality, and various controls for endogeneity issues.
Chinese equity markets, Information asymmetry, Internal control quality, Qualified foreign institutional investors
1057-5219
Li, Zhe
a9c524ce-3030-40bb-9bf5-6ca1ebf33d89
Wang, Bo
dc1fccae-55e8-4d28-8eb9-1c539247e940
Wu, Tianlong
11c7fb49-5863-4110-8179-18bd77f60537
Zhou, Dan
e3629dfa-35af-45e7-9c56-a9c0f47bc43f
Li, Zhe
a9c524ce-3030-40bb-9bf5-6ca1ebf33d89
Wang, Bo
dc1fccae-55e8-4d28-8eb9-1c539247e940
Wu, Tianlong
11c7fb49-5863-4110-8179-18bd77f60537
Zhou, Dan
e3629dfa-35af-45e7-9c56-a9c0f47bc43f

Li, Zhe, Wang, Bo, Wu, Tianlong and Zhou, Dan (2021) The influence of qualified foreign institutional investors on internal control quality: evidence from China. International Review of Financial Analysis, 78, [101916]. (doi:10.1016/j.irfa.2021.101916).

Record type: Article

Abstract

This study aims to investigate whether qualified foreign institutional investors (QFIIs) improve companies’ internal control quality to mitigate information asymmetry. By analysing a sample of 22,310 firm-year observations from Chinese listed companies between 2005 and 2017, we found that companies with QFIIs exhibit higher internal control quality and fewer internal control deficiencies. In particular, higher QFII ownership is associated with higher quality of internal control. Interestingly, QFIIs from high-governance-quality countries are more likely to improve the internal control system of their investee companies. Finally, the improvement in internal control quality attributed to QFIIs leads to better operating performance. Our results are robust to alternative measures of QFIIs, alternative proxies for internal control quality, and various controls for endogeneity issues.

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More information

Accepted/In Press date: 28 September 2021
e-pub ahead of print date: 25 October 2021
Additional Information: Funding Information: Our firm-level sample includes all Chinese A-share companies listed on either the SSE or the SZSE with internal control index scores from 2005 to 2017. The scores are obtained from the Dibo Internal Control and Risk Management Database,7 which evaluates the internal control activities of Chinese listed companies by assessing public information from the CSRC, SSE, SZSE, domestic and foreign media, and regulatory authorities. This database is widely used and cited by media, auditors, corporations, and scholars in China (Chen et al., 2017; Li, Han, & He, 2019; Wang et al., 2018). Publisher Copyright: © 2021 Elsevier Inc. Copyright: Copyright 2021 Elsevier B.V., All rights reserved.
Keywords: Chinese equity markets, Information asymmetry, Internal control quality, Qualified foreign institutional investors

Identifiers

Local EPrints ID: 452518
URI: http://eprints.soton.ac.uk/id/eprint/452518
ISSN: 1057-5219
PURE UUID: 13128f4e-9a51-4f49-8890-9aacef206345
ORCID for Bo Wang: ORCID iD orcid.org/0000-0001-9417-2214

Catalogue record

Date deposited: 11 Dec 2021 11:25
Last modified: 28 Apr 2022 02:33

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Contributors

Author: Zhe Li
Author: Bo Wang ORCID iD
Author: Tianlong Wu
Author: Dan Zhou

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