Study Of The Relationship Between Internal Corporate Governance And Cost Of Equity

Multiple occurrences of economic crisis made people concerns more and more about how to build perfect management system for modern companies. Under the shareholder wealth maximization goal, corporates are keeping competition, which is competition on corporate governance in essence, to finance more in the capital market. A company with good corporate governance may obtain higher return on investment more easily. The lower the financing cost, the stronger the financing capacity. With the rapid development of Chinese economy, the governance structure of listed companies appears high degree of share centralization, high state-owned share proportion, high non-tradable share proportion, and so on. Many companies have low efficiency on corporate governance and high financing cost. Therefore, the research on listed companies' governance structure, especially the internal governance characteristics, is important for the managers and investment decision-makers to make sensible and informed financial decisions, improve corporate governance standards, improve financial efficiency.For the empirical study part of this paper, we choose Chinese listed companies from 2004 to 2008 as the sample data, achieving 2587 datas, in order to research five issues about Chinese listed companies corporate governance:1. Do the ownership structure and Ownership Concentration have an influence on companies' cost of equity? And what's the extent of the influence? 2. Does the board characteristic have an influence on companies' cost of equity? And what's the extent of the influence? 3. Does the executive compensation incentive mechanism have an influence on companies' cost of equity? And what's the extent of the influence? 4. How the three aspects affect the cost of equity together? 5. What's the difference between state-owned and private holding listed companies about the corporate governance's impact on cost of equity?Empirical part of this paper is mainly divided into two parts:the first part, analyze the three aspects' (including equity characteristic, board characteristic and CEO pay mechanism) influence on the capital cost of equity of Chinese listed companies. The second part, analyze the integrated three aspects'influence on the capital cost of equity of Chinese listed companies and do a comparative analysis between state-owned and private holding listed companies.The main conclusions of this thesis are:1. China's listed companies are with high degree of concentration, but the largest shareholders have more positive influence on corporate governance; 2. Equity structure of listed companies in China is unreasonable. The excessively high proportion of state-owned shares has a negative effect on cost of equity reduction; 3. Although China's unique phenomenon of non-tradable shares has been improved through the share-trading reform, it still takes up a higher percentage, having a serious impact on the capital cost of equity;4. In the board characteristics of China's listed companies, the board size and audit committee establishment has more significant impact on the capital cost of equity than others;5. China's listed companies have not built up an effective incentive mechanism for senior management.