A Study Of Relationship Between Board Independence And The Cost Of Equity Financing

With the implementation of the tight monetary policy, the financing for SME is becoming increasingly difficult in recent years. From Wenzhou Usury Crisis to "Wu Ying" case in recently, we can see that the non-normal private credit is tend to be the main financing channels for SME. On the other hand, nearly80%in the listed companies in China are the state-owned holding enterprises, which invest in small and medium-sized enterprises, such as real estate, minerals and so on, with its convenient financing channels, playing the role of the "Chinese shadow banking". However, some state-owned holding enterprises which are not operating well rely on local government subsidies and a variety of restructuring, mergers and acquisitions to occupy valuable resources of the stock market. The cost of equity capital is a measure of the equity financing costs, the higher the cost of equity capital indicates that the higher the cost which company financing through equity. Good corporate governance can improve the company’s operating performance, thereby affecting the cost of equity capital. Board Governance is the core part of corporate governance. Agency Theory points out that the internal oversight function for reducing the agency costs is one of the most important functions of the board, and the Board Independence is an important prerequisite and an important part of performing its oversight function for the board. More independent is the board, more able to exercise their oversight functions and reduce the company’s internal agency costs, thereby reducing the cost of equity financing. If Board Independence and the cost of equity financing presents a significant negative correlation, then the supervisory functions of the board of directors gets the effective implementation. On the contrary, if is not a negative correlation or the negative correlation between board independence and the cost of equity financing is not significant, then the supervisory functions of the board has not been effectively implemented. This article is based on that logic, analyzing and comparing the implementation of the oversight functions of the board under the different ultimate control through theoretical and empirical research. The article provides a reference value for the applications of national standards of corporate governance mechanisms in a mature market to special ownership of listed companies in China, while providing some reference significance for our company to build a diversified capital markets to meet the financing needs of the different nature of enterprises.Under the theme of the different impact of the board independence to the cost of equity financing with the ultimate control, this thesis arrange the independence of the board of directors, the accounting of the cost of equity financing and the impact of the board independence on the cost of equity financing as the literature review,after the first part of the introduction. After that, this thesis explore the concept of ultimate control person, the theoretical basis of Board Independence on the cost of equity financing, as well as the independence of the board of directors under the ultimate control perspective in equity financing costs. The article put forward the theoretical analysis of the research hypothesis and research design, finally draw conclusions and propose relevant policy recommendations,after the empirical analysis and robustness testing.As to the research method, this thesis select the A-share listed companies of more than4,000samples between2004to2010, with multiple linear regression model as the main regression analysis, this thesis select the explanatory variables for China’s national conditions, the control variable and the measure of empirical research. In this paper, with the integrated use of a combination of literature analysis and empirical methods,the author use the multiple linear regression on the basis of theoretical analysis, empirical research methods, to support the research hypothesis of this paper.With the multiple linear regression as the main means of analysis method, this thesis got the following conclusions from the explanatory variables:①In the case of the same other conditions, compared to the private holding of listed companies, state-controlled listed companies are more likely to enhance the board of directors independent performance to reduce the cost of equity financing, the oversight functions of the board of directors of state-owned listed companies can better be implemented.②In the case of the other things being equal, compared to the central-government-control state-owned listed companies, local-government-control state-owned listed companies are more sensitivity between the independence of company’s board of directors and equity financing costs, the state-owned listed companies controlled by the local government can better perform oversight functions in order to reduce agency costs.③In the case of the other things being equal, compared to the government-direct-control listed companies, the government-indirect-control listed companies are tend to of more significant impact between the independence of company’s board of directors and equity financing costs,the oversight functions of the board of directors of the government-indirect-control listed companies can better be implemented.Innovative point of this study has two main aspects:first, with the perspective of the ultimate controller, this thesis compare the different impacts between the independent of the board with the cost of equity financing in different ultimate controlled companies through the sample group compared regression analysis.Second, as to the measure of board independence, the thesis select five variables as proxy variables, including the proportion of independent directors, the separation of the chairman and general manager, board size, the number of professional committees to reflect the independence of the board of directors.