Improving internal control quality as a corporate response to the Forbes Rich List

Abstract

This study takes advantage of the Forbes Rich List as an external shock to examine its effect on internal control quality in mainland China. Using the difference-in-differences (DiD) method for a large sample of 17,910 firm-year observations from 2000 to 2014, we find that firms controlled by entrepreneurs included in the Forbes Rich List tend to have higher internal control quality than firms not controlled by entrepreneurs in the list. The listed entrepreneurs improve their firms’ internal control quality by means of reducing the information asymmetry between the firms and outsiders. Further tests show that the event effect is more pronounced when firms have higher misreporting costs and when listed entrepreneurs hold chairman positions than in other situations. Our results remain robust after applying the propensity score matching method, stacked DiD estimation, and an alternative measure of internal control quality. These findings enrich the literature on the effect of the Rich List and the determinants of internal control quality in emerging markets.