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

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  • Kam C. Chan
  • Yining Chen
  • Baohua Liu

Abstract

This study examines the impact of internal control and its five components on corporate innovation using the Committee of Sponsoring Organizations (COSO) framework with 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.

Suggested Citation

  • Kam C. Chan & Yining Chen & Baohua Liu, 2021. "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, Taylor & Francis Journals, vol. 30(4), pages 733-765, August.
    • Handle: RePEc:taf:euract:v:30:y:2021:i:4:p:733-765
    DOI: 10.1080/09638180.2020.1776626
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    Cited by:

    1. Luo, Yonggen & Wu, Huiying & Ying, Sammy Xiaoyan & Peng, Qiuping, 2022. "Do company visits by institutional investors mitigate managerial myopia in R&D investment? Evidence from China," Global Finance Journal, Elsevier, vol. 51(C).
    2. Zhang, Chengrui & Li, Zhaohong & Xu, Jiaqian & Luo, Yiyang, 2024. "Accounting information quality, firm ownership and technology innovation: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 93(C).
    3. Tu Thanh Hoai & Nguyen Phong Nguyen, 2022. "Internal Control Systems and Performance of Emerging Market Firms: The Moderating Roles of Leadership Consistency and Quality," SAGE Open, , vol. 12(3), pages 21582440221, September.
    4. Lhuillery, Stéphane & Tellechea, Marion & Thiéry, Stéphanie, 2023. "Innovation in lieu of compliance: Internal audit departments’ standardized and non-standardized knowledge sources," Technovation, Elsevier, vol. 123(C).
    5. Zhouzhou Lin & Dezhi Liang & Shengnan Li, 2022. "Environmental Regulation and Green Technology Innovation: Evidence from China’s Heavily Polluting Companies," Sustainability, MDPI, vol. 14(19), pages 1-18, September.
    6. Chenxi Zhang & Shanyue Jin, 2022. "How Does an Environmental Information Disclosure of a Buyer’s Enterprise Affect Green Technological Innovations of Sellers’ Enterprise?," IJERPH, MDPI, vol. 19(22), pages 1-25, November.
    7. Huang, Wei & Goodell, John W. & Xia, Qing & Yuan, Shuai, 2024. "Trade credit provision and innovation: A strategic trade-off," International Review of Financial Analysis, Elsevier, vol. 94(C).
    8. Li-Min Chuang & Yu-Po Lee, 2023. "Toward Sustainable Development: The Causes and Consequences of Organizational Innovation," Sustainability, MDPI, vol. 15(10), pages 1-22, May.
    9. Qianhui Ma & Lan Ju & Zishi Zhang, 2022. "Innovation Input and Firm Value: Based on the Moderating Effect of Internal Control," Sustainability, MDPI, vol. 14(18), pages 1-24, September.
    10. Yahui Li & Wenli Zheng & Yunhui Zhao, 2022. "How Does Green Search Promote Green Innovation? The Mediating Role of Green Control," Sustainability, MDPI, vol. 14(16), pages 1-26, August.
    11. Xinyuan Wang & Zhenyang Zhang & Dongphil Chun, 2021. "The Influencing Mechanism of Internal Control Effectiveness on Technological Innovation: CSR as a Mediator," Sustainability, MDPI, vol. 13(23), pages 1-17, November.
    12. Huang, Dan & Liu, Baohua & Chan, Kam C. & Chen, Yining, 2023. "Intended and unintended effects of mandatory R&D disclosure on innovation outcomes," Economic Modelling, Elsevier, vol. 119(C).
    13. Song, Yan & Xiu, Yifan & Zhao, Mengyang & Tian, Ye & Wang, Jingyuan, 2024. "Intellectual property protection and enterprise innovation: Evidence from China," Finance Research Letters, Elsevier, vol. 62(PB).
    14. Ruba Hamed, 2023. "The Role of Internal Control Systems in Ensuring Financial Performance Sustainability," Sustainability, MDPI, vol. 15(13), pages 1-18, June.
    15. Zhang, Jing & Zhang, Lu & Zhang, Mancen, 2024. "Media pressure, internal control, and corporate environmental information disclosure," Finance Research Letters, Elsevier, vol. 63(C).
    16. Dan Huang & Jie Cheng & Xiaofeng Quan & Yanling Wu, 2024. "Managerial attention to environmental protection and corporate green innovation," Review of Quantitative Finance and Accounting, Springer, vol. 63(3), pages 1047-1081, October.
    17. Yu, Lin & Lv, Haixia & Fung, Anna & Feng, Keyou, 2024. "CEO turnover shock and green innovation: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 92(C), pages 894-908.
    18. Dr.Muganda Munir Manini & Dr.Umulkher Ali Abdillahi, 2023. "Does the Internal Control Environment Drive the Performance of Cooperatives? A PLS-SEM Perspective," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 7(7), pages 721-745, July.
    19. Hui Wang & Anyin Jiang & Fayyaz Ahmad & Nabila Abid & Abbas Ali Chandio, 2024. "Attribute imbalances and innovation implementation based on grounded theory: A case of Chinese enterprises in Gansu Province," Business Strategy and the Environment, Wiley Blackwell, vol. 33(2), pages 407-423, February.
    20. Shen, Haomin & Cheng, Xiaoke & Sun, Qian & Wang, Xin & Zhao, Jianmei, 2024. "Does internal control affect firms' use of derivatives? Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 85(C).

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