The Research On Relationship Between MD&A And Cost Of Equity Capital

In the capital market, information are very important to decision maker, it acts as the bridge connecting business and investors. When making investing decision, investors need the public disclosed information from the list corporation, to make judgment and forecast about the company’s future development. Thus the quality of information disclosure will influence the efficiency of capital market directly. Truly and sufficient information disclosure could reduce the information asymmetry and sustain a steady trading environment, and reduce the decision failing probability. False and bias information could enhance such probability, reduce investing enthusiasm, and even lead to the downturn of capital market and the whole economy. So research concerning information disclosure is very essential. Investors usually desire complete, timely and fairly information.However, motivation of information disclosure from management are different from investors, this leads to varies levels of information disclosure. Some disclose false and incomplete information to pursue the maximization of corporation benefit and individual benefit. Some actively disclose sufficient information to attract potential investors to benefit the future development. Short-sighted management simply regards disclosure as a task to be coped with.Facing the numerous amount of information, investor could easily get lost in it, failing to identify the most decision relevant part. Management analysis is the ghost of the financial reports. Management express their view about the past and the future of the business, this is the most valuable part of the report. It provides what the notes and financial statement couldn’t provide according the GAAP. They act better in the relevant and forecast aspects. Therefore, this essay investigates the importance of management analysis to the investors.However, a separate study in Management Discussion and Analysis of the level of disclosure is clearly not enough, we need to find a carrier, through the Researching it to reach the aim. We know that the typical financing behavior of listed companies in the capital market is the equity financing. Listed companies compete for the scarce resources in the capital markets. Due to the existence of asymmetric information, investors cannot acquire comprehensive and accurate understanding of the relevant information of listed companies, in order to avoid risks, they require a higher return on investment, this will increase the cost of equity financing of listed companies. So, if a listed company discloses more voluntary information, improve the transparency of information, disclose more information about the company’s core competitiveness and future prospects, investors will be able to have more confidence and will reduce the require of risk compensation, thus increasing the company’s financing opportunities, reduce the cost of equity financing.From this point of view, this paper argues that the sufficient Management Discussion and Analysis disclosure level can have an impact on the cost of equity financing. The main line of this article is to firstly study the Management Discussion and Analysis overall level of disclosure, which is to examine the result of CSRC amendments; secondly, choosing listed company with equity financing conditions and examining whether their Management Discussion and Analysis impact the cost of equity financing. If there is significant impact, investors can focus on the management discussion and analysis, the idea of the different sub-module feature should be recognized and digested to make more informed decisions. I hope this study can enrich this field of research and theory, to help the healthy development of China’s capital market.In this paper, the theoretical analysis as follows:As the MD&A is just introduced into our country, there is no mature sample. This essay argues that even within the same industry, management’s discussion and analysis level is very different. And capital markets can identify this difference and respond to it. If the listed company could disclose more company core competitiveness and future trends, improve the transparency of information, investors will be more willing to invest, and will reduce the risk compensation claims, and thus increase the company’s financing opportunities, reduce financing costs.According to the above theoretical analysis, this paper elaborate from the following chapters: The first part is the introduction, stating the research background, research objectives, research methods, essay structure and the innovation.The second part is the literature review section. This section detailed review the domestic and foreign research results on the Management Discussion and Analysis, comparing different research directions and research methods, commenting the existing results.The third part analyzes the level of disclosure of the Management Discussion and Analysis. Reference to an existing evaluation methods, considering the content and nature of the two dimensions, the establishment of the Management Discussion and Analysis of China’s listed companies, the level of disclosure evaluation system, the development of the scoring criteria by manual processing has been on both sides, from the nature and content of access to China’s Shanghai A shares manufacturing2002010Management Discussion and Analysis of the indicators observed in the current policy under the conditions of the listing of the Company’s management discussion and analysis of information disclosure, China. Summary manually collected evaluation disclosure, and as an indicator of the level of disclosure of the Evaluation Management Discussion and Analysis. According to the summary of results from every point of the level of disclosure of the Management Discussion and Analysis, management discussion and analysis of information disclosure of listed companies in China are low, varying degrees of different nature and content of information disclosure.The fourth part is the empirical test of the level of disclosure of the Management Discussion and Analysis of China’s listed companies on the impact of the cost of equity financing. Having made three assumptions. the paper selected the equity refinancing conditions in the manufacturing of Shanghai Stock Exchange listed companies as a sample, to test the underlying assumptions and analysis of empirical results.The fifth part is the interpretation of the conclusions of the study as well as policy recommendations, and pointed out that the lack of this article and future research trends.In this paper, the empirical research carried out in accordance with the following ideas:First, the management discussion and analysis of the level of disclosure and the cost of equity financing relationship literature analysis, made the following assumptions:For listed companies with equity refinancing eligibility, H1:Management Discussion and Analysis disclosure overall higher the quality of the company, the cost of equity financing, the lower; H2:Management Discussion and analysis of financial disclosures, the higher the quality, the lower cost of equity financing; H3: Management Discussion and Analysis in the forward-looking the higher the quality of information disclosure, lower the cost of equity financing.Secondly, taking into account the estimated cost of equity financing nature of the study, many models, the residual income model to calculate the cost of equity financing SSE manufacturing companies in China, the summary the good management discussion and analysis of disclosure index and equity financing costs calculated by the model into the regression model, the regression analysis. We found that the manufacturing disclosed in the Management Discussion and Analysis of the level of disclosure has a significant impact on the cost of equity financing. The higher the level of disclosure, the lower the cost of capital of listed companies equity refinancing. In addition, we also found that the Management Discussion and Analysis for the financial part of the cost of equity financing was a significant negative correlation, the financial information disclosed more fully, lower the cost of equity financing; portion of the disclosure of forward-looking information as possible, especially Risk Warning section full disclosure when investors more cautious about their attitude, thereby increasing the cost of equity financing. Business information section and special events part of the information on the cost of equity financing is not significant.Finally, for the above research results for different types of MD&A suggestions for improvement, and put forward their own views on policy improvements.In the short-term perspective, we study the MD&A disclosure of information’s effects on the short-term cost of equity financing. We use the MD&A of various indicators on the stock CAR econometric both cross-sectional data or panel data, we have found that MD&A investment and financing status information and stock CAR significantly negative related, will cause the cost of equity financing short-term rise; further study, we find it is future investment and financing conditions play a role, rather than historical investment and financing information.