Capital Institutional Ownership Of Cost-effectiveness Study

The cost of capital is the required rate of return decided by investors’ trade-offbetween risk and return. It is an very important concept in the modern financial theory.From a microscopic point, the cost of capital impacts on the enterprise value directly, andit exists throughout the enterprise financial policy making process, the cost of capital is theevaluation criterion for investment behavior, financing capacity and the distribution ofprofits. From a macroscopic point, the cost of capital is the basic index for security systemconstruction and capital market development. The cost of capital plays a crucial role in thecapital market’s efficiency of organizing resource allocation and guiding the flow ofcapital. The importance of cost of capital in the company financial activities makes manyscholars have discussed its’ estimating techniques and influencing factors positively anddeeply. Accompanied by the development of corporate governance theory and practicalresearch, more and more scholars keep on researching on listing corporation’s cost ofcapital from the point of principal-agent problem. Most current literatures about therelationship between corporate governance mechanism and cost of capital mostly focus onthe study of single corporate governance mechanism’s impact on the cost of capital.Internal governance mechanisms consist of equity governance, directorate control,management incentive and information disclosure. External governance mechanismsinclude corporate control, the legal protection of investors, product market competition andso on. It has formed a large number of academic achievements of the relationship betweena single governance mechanism and cost of capital. However, as an important governancemechanism, institutional ownership also can influence the cost of capital, which is ignored.Institutional investors are significant participation group in the capital market. As akind of investment institutions independent of controlling stockholders and minorityshareholders, institutional investors have better fiscal advantages, informational advantagesand professional competencies than individual investors. Institutional investors exert apositive role in pricing ex ante and supervising ex post taken into account their advantageof economies of scale and long-term, rational investment, which will enhance theeconomic functions of the capital market. Last decade, under the supernormal developmentof institutional investors’ strategic guidance, institutional investors has been developingrapidly both in the number and in the scale. However, accompanied by the rapiddevelopment, institutional investors have exposed a lot of problems. Which made people doubt that institutional investors’ role in the exchange market of China, as well as questionthe principles and policies of institutional investors’ development.Founded on the principal-agent theory, asymmetric information and corporategovernance theory, this paper analyzed and tested the cost of capital effect of institutionalownership. The research sample is China’s listing corporations from2005to2012. Thepaper has three ways: institutional ownership’s direct effects on the cost of capital,institutional ownership’s indirect effects on the cost of capital and the influence ofheterogeneity of institutional investors on cost of capital.The first way called institutional ownership’s direct effects on the cost of capital,which has been divided into four aspects: institutional ownership or not, holding ratio,holding period and the shareholding ratio. The result is that institutional investors canreduce the cost of capital and they can effectively play the role of corporate governance. Atthe same time, the cost of capital of the listing corporations with institutional investors isless than the one of listing corporations without institutional investors. The cost of capitalof the listing corporations with higher proportion of institutional investors is less than theone of listing corporations with lower proportion of institutional investors. The cost ofcapital of the listing corporations with longer holding period is less than the one of listingcorporations with lower holding period. And the higher the holding proportion ofinstitutional investors, the lower the cost of capital.The second way is called institutional ownership’s indirect effects on the cost ofcapital. It mainly research whether institutional ownership impacts the cost of capitalthrough other internal governance mechanism or not. The paper tests whether ownershipgovernance mechanism, director governance mechanism and management governancemechanism are the intermediary variable and interactive variable or not in the process ofinstitutional ownership’s influences on the cost of capital. The result shows thatinstitutional investors have positively corporate governance effect and can decrease listingcorporation’s cost of capital. Ownership governance mechanism, director governancemechanism and management governance mechanism are not the intermediary variable, butsome indexes have a significant interaction effect with institutional investors governancemechanism.The third way is called the influence of heterogeneity of institutional investors on thecost of capital. The paper analyzes securities investment fund, securities companies,insurance fund, the social security fund and qualified foreign institutional investors, whichgive different effects on the cost of capital. The result shows that different institutional ownership has diverse effects on the cost of capital. The securities investment fund has anegative effect on the cost of capital, and the higher holding ratio of institutional investors,the lower the cost of capital. There is a negative correlation between the social securityfund and the cost of capital, and the social security fund can play the positive effect ofcorporate governance. Securities companies, insurance fund and qualified foreigninstitutional investors do not have any significant correlation with the cost of capital.In this dissertation, the main innovations are: First, take the corporate governanceplayed by institutional investors as the theoretical foundation, study institutionalownership’s role and impact on the cost of capital, and further explore the path ofinstitutional investors’ impact on the cost of capital. Which deepened the study ofinstitutional investors in corporate governance effect on the one hand, supplied andimproved the study on the influencing factors on the cost of equity capital on the otherhand.Second, the paper research institutional ownership’s direct effects on the cost ofcapital, and divide into four aspects: institutional ownership or not, holding ratio, holdingperiod and the shareholding ratio, which give the authors a comprehensive analysis of theimpact of institutional investors. The conclusion of the study is objective, comprehensiveand clear, and it can give some government departments and listing corporations relatedto China’s capital market some useful guidance in the formulation of relevantpolicies.Third, the paper research whether institutional ownership impacts the cost ofcapital through other internal governance mechanism or not. The mediation effects andinteraction effects have been applied to analyse the path of institutional ownership’s roleon the cost of capital. Which theoretically opened the influence of institutional investorson the cost of capital. Fourth, the paper study the influence of heterogeneity ofinstitutional investors on the cost of capital and show different institutional ownership hasdiverse effects on the cost of capital. Which deepened and expanded the study ofinstitutional investors.The paper takes the cost of capital as a substitution of corporate governance variables.It studies on the relationship between institutional investors governance mechanism andcapital market, which not only investigates institutional investors’ governance functionsfrom the traditional perspective, but also explores the path of institutional investors’ effecton the cost of capital and different effect on the cost of capital by different types ofinstitutional investors. Institutional investors can play a constructive effect of corporategovernance. China’s securities market should promote the development of institutionalinvestors, standardize the operation of institutional investors, improve the overall level of institutional investors shareholding and realize the balanced development of institutionalinvestors.