The Linear and Non-Linear Effects of Internal Control and its Five Components on Corporate Innovation: Evidence from Chinese Firms using the COSO Framework

European Accounting Review, Forthcoming

60 Pages Posted: 15 Jun 2020 Last revised: 16 Jun 2020

See all articles by Kam C. Chan

Kam C. Chan

Western Kentucky University - Department of Accounting and Finance

Yining Chen

Western Kentucky University

Baohua Liu

Southwest Jiaotong University

Date Written: May 19, 2020

Abstract

This study examines the impact of internal control on firm innovation using a sample of Chinese firms. The impact of the internal control system as a whole, as well as the impact of the five components of internal control individually (i.e., control environment, risk assessment, control activities, information & communication, and monitoring), are analyzed. Our results suggest that internal control, as an integrated system, has significant positive impact on firm innovation, as measured by patent applications. We document that the magnitude of impact on innovation varies across different subcategories (components) of internal control, with control environment, control activities, and information & communication components exhibiting stronger impacts on innovation than those of risk assessment and monitoring components. In addition, we find that a high level of control environment, control activities, and information & communication (risk assessment and monitoring) components have a stronger (weaker) impact on innovation compared to a low level.

Keywords: Internal Control; Innovation; China

JEL Classification: G0

Suggested Citation

Chan, Johnny and Chen, Yining and Liu, Baohua, The Linear and Non-Linear Effects of Internal Control and its Five Components on Corporate Innovation: Evidence from Chinese Firms using the COSO Framework (May 19, 2020). European Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3605737

Johnny Chan (Contact Author)

Western Kentucky University - Department of Accounting and Finance ( email )

Bowling Green, KY 42101
United States

Yining Chen

Western Kentucky University ( email )

KY
United States

Baohua Liu

Southwest Jiaotong University ( email )

Chengdu, Sichuan
China

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