The Impact of Strengthening Legal Liability on the Effectiveness of Internal Control in Listed Companies

This paper utilizes the implementation of the new Securities Law in 2020 as a quasi-natural experiment, drawing on data from Chinese A-share listed companies spanning 2018-2022. It employs a multi-period difference-in-differences approach to investigate the impact of strengthening legal liability on the effectiveness of internal control in listed companies, along with the underlying mechanisms. The findings reveal that, in the full sample, the enhancing effect of the new Securities Law is not significant. However, it exhibits a significant positive impact on super-large enterprises in the top 75th percentile of asset size. Mechanism tests indicate that financial risk constraints serve as the core channel: the policy significantly reduces the leverage ratios of small and medium-sized enterprises, while in super-large enterprises, financial risks exert a significant negative influence on internal control. This study provides crucial evidence for understanding the conditional effectiveness of “harsh laws and stern punishments” style regulation, offering important theoretical and practical implications for advancing differentiated regulation and optimizing capital market governance.