The impact of corporate governance characteristics and remediation of internal control weaknesses on corporate performance: evidence from major China stock exchange markets

The integration of internal control and corporate governance has become a new research trend. The combination of effective internal control measures and a good corporate governance structure can improve the performance of enterprises. Based on the principal-agent theory, the information asymmetry theory, and the signal transmission theory, this study aims to examine the impact of corporate governance characteristics on the remediation of internal control material weaknesses (RICMW) from three aspects: the board of directors, audit committee, and senior executives. Furthermore, it aims to test the mediation effect of RICMW between corporate governance and corporate performance.

This study selected Chinese companies with material internal control weaknesses listed on the A-share market from 2009 to 2016 as the sample for research. These companies were observed for four consecutive years, obtaining the observation values of the sample companies from 2010 to 2020. A quantitative research based on panel data was conducted, utilizing statistical techniques such as descriptive statistics, correlation matrix, regression analysis, robustness test, principal component analysis (PCA), and mediation techniques (Baron & Kenny and Bootstrap Approach). STATA 15 and SPSS 26.0 software were employed for analysis.

The results revealed that the improvement of corporate governance level can promote the RICMW in enterprises. Specifically, in terms of the characteristics of the board of directors, a moderate increase in the board size , an increase in the proportion of independent directors among board members , and director incentives can promote RICMW. However, the dual roles of chairman and CEO are not conducive to RICMW. Regarding the characteristics of the audit committee, the establishment of an audit committee, a moderate increase in the audit committee size , an increase in members with financial expertise, and an increase in the number of audit committee meetings can promote RICMW. Concerning executive characteristics, an increase in executive compensation and executive changes were found to promote RICMW. Furthermore, improving corporate governance can effectively promote RICMW, thereby enhancing company performance. The RICMW plays a partial mediating role in the relationship between corporate governance and corporate performance. This study contributes by analyzing the impact of corporate governance on RICMW from three aspects: the board of directors, audit committee, and senior executives. Additionally, it tests the mediation effect of RICMW between corporate governance and corporate performance.