The Empirical Relations Research Of Company Reputation And The Cost Of Equity Capital

Enterprise financing is an important aspect of enterprise management system,the equity financing as the main financing way of enterprises,plays an important role in the capital markets. The reduction of cost of equity capital is not only important to the listed company,and to improve the efficient allocation of capital market,optimizing the allocation of resources has important influence.In view of this,this article through to literature review and summarization of the research results in the past about the company’s reputation and cost of equity capital,select the appropriate financial data of listed company,this article selects the 2010-2013 Shanghai and shenzhen main board A-share listed companies and the listed company to be voted in "China’s most admired companies",we investigate whether companies with better reputation enjoy a lower cost of equity financing. The study found that the higher reputation company can undertake to lower the cost of equity capital financing,even after controlling for other factors that affect the cost of equity capital. May safely draw the conclusion that the company who owns good reputation give the positive signals to investors,enterprise scale is larger,the more diversification,to resist the risk of system risk and non-system risk ability is stronger,it is easier to win the trust of investors,and reduce the cost of debt financing and equity financing of enterprise;Investors,of course,it will also consider enterprise’s growth,because the higher the growth of enterprise will bring them higher return on investment,accordingly,also will be able to get the favor of investors. In addition,according to the nature of property rights and the whole sample was divided into state-owned enterprises and non-state-owned enterprises,to return two subsample respectively,the results show that the relative to the state-owned enterprises,the company’s reputation in non-state enterprise are even more important impact on the cost of equity capital.This paper examine the association between company reputation and the cost of equity capital. We suggest that companies with better reputations should enjoy a lower cost of equity for several reasons. First,a good reputation signals higher company quality,conveying competence and business conduct consistent with shareholder interests. Company reputation is a function of various factors such as high quality management,ethical and talented employees,innovation capacity,etc. These factors are value relevant but are difficult for outsiders to observe,leading to systematic errors in their valuations(Chan et al. 2001; Edmans 2011; Hirshleifer et al.2013).Alternatively,the company reputation rankings that we use to proxy for company reputation are publicly available information, produced by financial analysts,directors,and executives who,because of their business interactions,are likely to possess private information supporting these rankings. Therefore reputation rankings can reveal value relevant information to the capital markets, reducing information asymmetry and hence the cost of equity. Second,Merton(1987) posits that stocks with lower investor recognition must offer higher returns to compensate shareholders for being imperfectly diversified,and empirical evidence supports this view(Loughran and Schultz 2005;Lehavy and Sloan 2008).Because the reputation rankings attract attention from the business media,we expect them to increase investor awareness of the company’s stock,expanding or maintaining a large investor base and leading to a reduction in the cost of equity. Finally,higher reputation companies provide higher quality financial reports(Cao et al. 2012),and higher earnings quality can lower the cost of equity by reducing information asymmetry(Francis et al. 2004,2005,Barth et al.2013).Thus companies with better reputations should experience a lower cost of equity because their higher earnings quality reduces information asymmetry.We contribute to the cost of capital literature by identifying a unique determinant of the cost of equity and to the reputation literature by demonstrating an important benefit that derives from creating and maintaining a high reputation.