Abstract: Using the data of A-share listed companies from 2011 to 2016 in Shanghai and Shenzhen,
we establish a panel threshold model，which the threshold variable is internal control, to analysis the effect of managerial ownership on corporate governance. The result shows, there exists an obviously nonlinearity relationship between proportion of managerial ownership and agency cost/operating performance based on internal control. If internal control quality is lower than the threshold, internal control system cannot supervise and motive managers due to the defects. Agency cost will be improved and performance will be reduced lead by entrenchment effects. If internal control quality is higher than the threshold, internal control system supervises and motives managers effectively. Agency cost will be reduced and performance will be improved lead by convergence-of-interest effects. Furthermore, the descriptive statistics result implies that, more than 90% listed companies’internal control quality are higher than the threshold, so convergence-of-interest effects are mainstream in Chinese capital market. Finally, we suggest that companies should adopt equity
incentive plan based on a good internal control system, then improve governance level and corporate
value.
Key words: Internal Control; Managerial Ownership; Entrenchment; Convergence-of-interest; Agency Cost; Operating Performance