Corporate Equity Investment, Subsidiaries Diversification And The Cost Of Capital

Whether does diversification have an impact on the cost of capital? Existing researches discussed the issue mainly from the consolidated level to explore the diversification of listed companies as a whole and relationship between costs of capital, without considering the listed companies’equity investments in subsidiaries of parent-subsidiary multi-agent difference characteristics. With the ratio of equity investment rising in the China’s listed companies and the investments distributed in various industries and regions, whether equity investment and subsidiaries diversification has an impact on the cost of capital becomes an important issue.Based on the perspective of subsidiary assets, this paper studies the relationship between subsidiaries diversification and the cost of debt/equity capital. On one hand, diversification can reduce the volatility of cash flow and earnings so that it can reduce the risk of company. On the other hand, agency problems and management of the subsidiary and parent proxy conflict between parent and subsidiary companies increase the cost of supervision. These make listed companies the overall rise in the cost of capital. Based on the agent theory, institutional environment, internal capital market theory and risk theory, this paper provides the interpretation of the relationship between subsidiary assets & subsidiaries diversification and the cost of capital.Using empirical data of subsidiary assets, subsidiaries diversification, cost of debt and equity capital about A shares of all listed companies from 2008 to 2013, the study found:(1) The higher of subsidiary assets, the lower the overall cost of debt & equity capital of listed companies; (2) With subsidiaries industry diversification rising, the group’s overall debt costs of capital reduce in listed companies with large subsidiary assets; (3) With subsidiaries industry diversification rising, the group’s overall equity costs of capital increase in listed companies with large subsidiary assets; (4) With subsidiaries region diversification rising, the group’s overall debt costs of capital reduce and equity costs of capital increase in listed companies with large subsidiary assets. The innovations of this paper are as followings:(1) Different from previous studies from the consolidated level diversification and the cost of capital, this paper discusses the relationship between the perspective of parent-subsidiary structure distribution and the cost of capital; (2) From the cost of debt capital and equity capital cost of two dimensions of comprehensive study subsidiaries affiliates asset size, diversity and relationship of the cost of capital, provide some empirical evidence about the cost of debt capital and equity cost capital comprehensive study of the relationship between the two dimensions of a diversified equity investment and the cost of capital for different forms of listed companies resource allocation and financial policies to develop strategies; (3) From the angle of the listed companies and the subsidiaries internal structure difference test diversification influence on the cost of capital, the paper enriches and develops relevant research literature of the factors that affect the cost of capital.The main contributions are:(1) Provide a more definitive empirical evidence about the relationship between diversified equity investment and the cost of capital; (2) The empirical results of diversified equity investment and the cost of capital has important significantly impact on listed companies’ capital risk management policy. The paper has certain significance for practice.