The Mediating Effect of Internal Control for the Impact of Institutional Shareholding on Corporate Financial Performance*

Abstract This study analyzes the mediating effect of internal control (IC) on corporate financial performance from an information economics perspective. The results show that effective IC has a significant mediating effect for institutional shareholding to improve financial performance. The mediating mechanism of IC is not reflected for institutional holdings other than Pressure‐resistant institutions. In addition, the magnitude of the mediating effect of IC for Stable long‐term institutional shareholding to improve financial performance is higher than that for Transactional short‐term institutional shareholding. Finally, this study provides some recommendations regarding strengthening the synergistic mechanism of external and internal governance on improving financial performance.