The Effectiveness of Internal Control and Corporate Social Responsibility: Evidence from Chinese Capital Market

Abstract

From the perspective of the effectiveness of internal control, according to the Stakeholder Theory, Principal-Agent Theory and Reputation Theory, this paper analyzes comparatively the influences of internal control on the assumption of corporate social responsibility (SCPS) from the accrual basis, and the fulfillment of corporate social responsibility (CSRF) from the cash flow system respectively. Using a sample of 1767 firms listed in China between 2011 and 2016, we find that effective internal control has significantly promoted enterprises to assume social responsibilities. Meanwhile, effective internal control substantially improves the fulfillment of corporate social responsibility. This study overcomes the current situation that the two concepts of assumption and fulfillment of corporate social responsibility have not been distinguished in previous literature. We suggest that, in the economic transition period, the positive role of internal control in corporate governance should be promoted to protect the legitimate rights and interests of stakeholders; the adverse impact of the principal-agent relationship between shareholders and management on corporate governance should be avoided, building high-quality internal control; enterprises achieve steady and sustainable development process by the positive reputation value and robust external monitoring mechanism. This research is of practical importance to strengthen the subsequent construction of the internal control system and the long-term practice of corporate social responsibility.

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