The Absence Of Cost Of Capital And The Function Faults Of Chinese Capital Market

There are many function faults in the Chinese capital market: The function of financing by shareholding (Equity interest) was excessively enhanced. However, the function of pricing and collocation and incentives and constraints are distorted badly. Based on the research of former scholars, this essay takes the Finance and Financial Management as a whole system, and breaks through the traditional way of research which divided the capital market from the corporate finance and deeply discusses the institutional reason of the function faults of capital market.This essay argues that as the point of intersection of corporate finance Investment and capital market, Cost of Capital is the deep institutional reason which makes great influence on the function of capital market. This essay does not only analyze the reasons why there are many function faults in Chinese capital market, but also breaks through the concept"Cost of Capital"in Finance and endues the cost of capital with the nature of proper rights of investors.and makes it as a key tool for analyzing the reasons for the function faults of capital market. Hereon, this essay uses the Investment, Corporate Finance, the New Institutional Economics and the Information Economics for reference, points out the various mechanism that the cost of capital influence on the function of capital market: first, we prove that the property right restriction of cost of capital is the necessary condition of preference of debt financing through a mathematic model. Second, by analyzing the model of stock pricing in theory, we point out that cost of capital i.e. the discount rate of risk is the basis of stock pricing and efficient market, also is the necessary condition of collocating function of the capital market. Third, by discussing the sufficient statistics of Incentive Model in the Information Economics, this essay points out the cost of capital plays an important role in the Incentive system for managers. And discusses the significance of the cost of capital on the constraints of managers, finally we put forward the institutional method that establish the sense of cost of capital.Through the above research, this essay points out the internal relation between the functional capital market and the concept of Cost of Capital. And provides a new point of view to study the deep problems of capital market of China.