The Research On The Effect Of Characteristics Of Controller And Real Activities Earnings Management On Cost Of Equity Capital

As an important factor in business decisions of companies, the cost of capitalwill influence the allocation and flow of capital. Equity financ ing preferencegenerally exist in the Chinese listed companies. In order to obtain the equityfinancing, the listed companies are likely to dress up their performance by meansof manipulating earnings. Previous studies about earnings management and thecost of equity capital mainly focused on accrued earnings, but the research es aboutreal activities earnings management which is more obscure are relatively lack.Based on special institutional background of China, the difference incharacteristics of controller would cause different economic consequences. Thus,how does the controller’s characteristics impact the relationship between the realactivities earnings management and cost of equity capital?Based on the2010-2012China’s A shares of listed companies as the objects,this paper respectively analyzes the relationship between characteristics ofcontroller, the real activities earnings management and cost of equity capitalthrough normative and empirical methods. Then, we furtherly examine the role ofthe characteristics of controller in the relations between the real activities earningsmanagement and cost of equity capital. Due to the empirical testing we can dra wthe following conclusions: The cost of equity capital of non-state owned listedcompanies is higher than state owned and government protection can reduce thereturn requirements for the state owned listed companies of the investors. Thehigher degree of real activities earnings management the higher the cost of equitycapital, and the covert real activities earnings management cause the higher degreeof information asymmetry between managers and investors, so the investorscompensate the uncertain risks it faces by increasing the risk premium. Therelationship of real activities earnings management and cost of equity capi tal isimpacted by the characteristics of controller, state owned nature would weaken thepositive relationship between the real activities earnings management and cost ofequity capital.According to the above conclusions, this paper put forward some spe cificsuggestions, such as promoting government functions, further completinglegislation system of investors’ protection, and improving the system ofinformation disclosure of listed companies, then promoting internal governance oflisted companies; and positively developing debt market. We hope that they could be conducive to reduce the cost of equity capital of Chinese listed companies andprotect the interests of investors.