Internal Control, Political Connection, and Executive Corruption

This paper examines the effect of internal control with a focus on implicit corruption of executives. Using the data from Chinese listed companies since 2010, we find that internal control plays a significant role for preventing corruption, but it is weakened if executive has political connections. These political connections tend to be representative-type rather than official-type. Our findings also suggest that compared with state-owned enterprises, internal control mechanisms in non-state-owned ones are more likely to be weakened when executives with political connection. Furthermore, we provide evidence that as executives’ political connections getting tighter, internal control which can prevent corruption becomes less effective.