Can internal auditing mitigate corporate financialization?

Purpose This study aims to examine the impact of internal auditing quality (IAQ) on Chinese corporate financialization and its underlying mechanisms. Design/methodology/approach This study uses regression models to test the research hypotheses using a sample of nonfinancial firms listed on China’s A-share market from 2008 to 2022. Findings The study finds that: (1) Internal auditing significantly inhibits corporate financialization, with results remaining robust after comprehensive robustness checks and endogeneity tests; (2) Mechanism analysis reveals that internal auditing curbs corporate financialization through three distinct channels: reducing agency costs, enhancing accounting information quality and strengthening corporate growth potential; and (3) Heterogeneity analysis indicates that the constraining effect of internal auditing on financialization is particularly pronounced in firms with robust internal control systems, management teams lacking financial expertise and advanced digital transformation. Practical implications The findings of this study offer targeted recommendations that have practical significance for enterprises. These suggestions aim to improve the construction of internal audit functions, reduce corporate financialization and promote the high-quality development of firms. Originality/value This study contributes to the literature by highlighting the governance role of internal auditing in mitigating corporate financialization. It advances our understanding in two key ways: first, by establishing internal auditing as a critical microlevel mechanism for constraining financialization; and second, by uncovering the underlying mechanisms through which internal auditing influences corporate financialization.