Research On The Influencing Factors Of Cost Of Equity Capital In China's Listed Companies

In recent decades, the theoretical breakthrough in the areas portfolio diversification, market efficiency and asset pricing has been transformed to concern of the company's cost of capital. The cost of capital plays a vital role in the company's capital budgeting, financing decision, performance evaluation, business valuation and other aspects. Easley and O'Hara (2004) pointed out," the cost of capital is so important that many policies are set to reduce the company's cost of capital". Thus, the cost of capital is one of the important research subjects in the area of financial theories. The cost of equity capital is an important content of the cost of capital, it is a key problem to research the influencing factors of the cost of equity capital. Based on the existing literatures, we can find that the foreign scholars have studied the theories and the empirical tests about the influencing factors of the cost of equity capital for a long history, and the domestic scholars began to study it in recent years. But at present the domestic scholars mostly carry on the theoretical research and empirical test based on the single influencing factor, rarely on multi-influencing-factors. So it will easily lead people to have one-sided understanding of the influencing factors of the cost of equity capital, not have comprehensive and intensive concepts. They do not know which factors influence the cost of equity capital and how do they affect. Although many foreign scholars have researched the multi-influencing-factors, it also needs further inspection whether the conclusions are feasible in our country's specific environment of capital market. So this dissertation focuses on the characteristics of company, industry and institutional factors. tries to find how do they affect the cost of equity capital.It is of the theoretical significance and practical value to research on the influencing factors of the cost of equity capital in China. In theory, Firstly,The study helps to promote the microscopic financial asset pricing theory. N. Garleanu. L. Pedersen (2004) pointed out:"Understanding the equilibrium expected return-the required return on securities is the fundamental goal of asset pricing." The cost of equity capital is very important to asset pricing, it affects the realization of price discovery function in capital market. The existing literature reflects the relationship of single factor and the cost of equity capital. However, the dissertation systematically studies multi-influencing-factors of the cost of equity capital, and finds some risk factors in Chinese stock market which are different from that of the United States of America stock market. it will be helpful to predict the cost of equity capital. Secondly. it also contributes to explain the capital market vision scientifically. Many empirical studies prove that China's listed companies have significant equity financing preference. Some scholars in our country try to explain the equity financing preference from the financing cost perspective, and consider that the average cost of equity financing is lower than debt financing cost. This dissertation examines a number of factors which affect financing cost, and provides a theoretical basis to better explore the financing behavior of China's listed companies. Finally, this dissertation clarifies the concept of capital cost, reveals the essence of capital cost and analyzes the influencing factors of the cost of equity capital, it will contribute to complete our capital cost theory system.In practice, researches on the influencing factors of the cost of equity capital are of reference value and practical significance for enterprise management, national policy makers. Firstly, the research is helpful for enterprise manager to make reasonable decision of investment and financing. From the investment point of view, this research provides the basis for determining the required return of investment; from the financial point of view, it helps to reduce the listed company financing cost, and improve the efficiency of capital market. The efficiency of capital market is that it can enable enterprises to lower the cost of financing and make equilibrium pricing (Wang Wei. 2005). In order to maximize the value of enterprises, managers have the motivation and pressure to reduce the cost of equity capital. Therefore, this research has important practice significance for the enterprise to make reasonable financing decision. Secondly. this dissertation provides related reference for making the institutions and policies. On the one hand it helps the government to adjust the industrial structure and promulgate laws and regulations:On the other hand it also helps China's listed companies to change the equity financing preference.Taking China's capital market as research background, this dissertation takes the influencing factors of the cost of equity capital as the research objective, and engages to construct a theoretical framework to explain the influencing factors and verify the framework by empirical research. Specifically, the author wants to gradually achieve four research goals in this dissertation:Goal 1. clear the concept and essence of capital cost. Goal 2, construct explain framework for the multi -influencing-factors of the cost of equity capital. Goal 3, provide empirical evidence for explain framework. Goal 4. present the research enlightenment.Specially speaking, the research design of this dissertation spreads in turn according to the five progressive levels. The first level is the study of the premise. In this level, study motivation and research value are presented from the theoretical background and practical background. The second level is the research basement. First of all, the relevant literature is reviewed, the defects of existing research literature are found, and the beneficial enlightenment is summarized; secondly, clear the equity capital cost concept, feature and its application value. The third level is the theoretical analysis. On the basis of previous studies, the mechanism of influence is analyzed, and the framework is constructed based on characteristics of company, industry and institutional factors. The fourth level is the empirical testing. The empirical evidence of the influencing factors of the cost of equity capital is provided. The fifth level is the conclusions and enlightenment.Based on the above mentioned research logic, this dissertation consists of seven parts.The first part is the introduction. In this part, some basic issues in the dissertation are mainly discussed, including the research background, the theoretical value and practical application value of this dissertation, the basic ideas and method, and main research contents.The second part is the literature summary. The previous literatures about the influencing factors of the cost of equity capital are summarized in this part. The literature summary is focused on estimation researches and influencing factors of the equity capital cost. The problems and limitations in previous literatures are summarized, and the useful inspiration in previous research is discussed.The third part is about the basic theory of capital cost of equity. The concept of capital cost is relatively confused in our country, so based on discussion of the cost of capital connotation and the essence, this part clears the meaning and feature of the cost of equity capital, elaborates the applications and the influencing factors.The fourth part is the theoretical analysis about the influencing factors of the cost of equity capital. In order to study the factors which influence the cost of equity capital comprehensively and systematically, the framework is constructed based on characteristics of company, industry and institutional factors, and the relevant theoretical basis is discussed, including the capital structure theory, asymmetric information theory, agency theory, liquidity theory.The fifth part is about the design of empirical tests, including the study of sample selection and data sources, research variables and index selection, research hypothesis, model of calculating equity capital cost, which provide the foundation for the next part.The sixth part is about the empirical test process and result. The author uses the GLS model to calculate the cost of equity capital, regards the one-year deposit rate as the risk free rate, and tests twelve risk factors how to influence the risk premium.The seventh part is about conclusions and expectations. First of all. sum up the above theoretical researches and empirical tests. Secondly, present research enlightenment. Finally, sum up the contributions and shortcomings of this dissertation and looks forward to the follow-up research.The previous research on the influencing factors of the cost of equity capital is very extensive. Based on the previous research, innovations and contributions in this dissertation are as follows.Firstly, the previous researchers mostly discussed what influence a single factor had on the cost of equity capital. This dissertation systematically examines the impact of characteristics of company, industry and institutional factors, and finds some important influencing factors of cost of equity capital, such as industry average risk premium level (INDUS), book to market value ratio (BM), the proportion of shares in circulation (LIUTV) and the size of the company (SIZE). This research conclusion provides a basis for asset pricing, corporate investment and financing decisions.Secondly, Listed companies often need to calculate the potential cost of equity capital when they will make equity investment decision. The traditional CAPM insists that market volatility (BETA) is the major determinant of the cost of equity capital. but the study shows that market volatility (BETA) doesn't have significant correlation with the risk premium, so the calculation using this factor solely could cause error. This research conclusion validate some scholars'perspective that the capital asset pricing model is not applicable in China's securities market. Therefore, we should seek a more effective method to calculate the cost of equity capital. Thirdly, most current studies focus that it is because of the low cost of equity capital that China's listed companies have a strong preference to equity financing and the abnormal pecking order. This dissertation focuses on the characteristics of company, industry and institutional factors, tries to find how do they affect the cost of equity capital, so as to better explore the financing behavior of listed companies.Fourthly, in the empirical research process, the author selects the lag period risk factors as explanatory variables, which can reflect the influence of the risk factors accurately, and as far as possible to avoid the problem of endogenous. The author considers the non-tradable shares reform which is an issue unique to the capital market in China. The results show that the non-tradable share reform is an important factor to affect the cost of equity capital.