Information Asymmetry,Cost Of Equity Capital And Efficiency Of Capital Market

This paper focuses on information asymmetry, equity capital cost and capital market efficiency on the basis of that information asymmetry brings influences to equity capital cost. Overseas experts paid much attention to the task since 1960s, whose outcomes have been published in《the Accounting Review》,《Corporate Finance》,etc., during recent years. Meanwhile, the up-to-date domestic researchers start to concentrate on it, as well as come out with several pioneering articles on Journals such as《Economic Research》,《Management World》,《Accounting Research》,and so on.Information mainly means new recognition to analysis objective. The new recognition, which can be used to revise the old ideas, is precious"treasure"for users. Information asymmetry means one side generally has better information than other sides, so that information appears asymmetric on the whole. My research is to describe the objective situation about information asymmetry. Information asymmetry is constant. Absolut information symmetry doesn't exist factly. Equity capital cost, the lowest return interest of common stockholders, is a kind of expectation according to information, especially accounting information. The complexity of capital cost research performs on equity capital costs mainly. Under both hypothesis of information symmetry and ideal market, CAPM regards system risk as the influential factor of equity capital cost. We can estimate equity capital cost via pricing system risk . Yet in domestic capital market, information asymmetry is more severe, so equity capital cost which is computed by CAPM would be lower and the discount valuation would be higher. This causes a serial of decision mistakes and influences capital market efficiency.The paper structure arrangement is as follows:The first chapter is introduction. Firstly, define the concepts of information asymmetry,the equity capital costs and capital market efficiency.There is intrinsic connection between information asymmetry and the cost of equity capital . Cost of equity capital is rate of necessary return , which is affected by the condition of capital market information distribution. Secondly, explain reasons of choosing the subject and summarize answers about the investigation.Chapter II is a review of literature, and points out research purposes. Existing theoretical analyses are mainly from perspective of transaction cost, liquidity or risk premium. There are a lot of specific analysis methods. Scholars probed into equity capital cost from country, industry and corporate levels. My purposes of the study are to clarify major elements of information asymmetry, propose a rational approach to price information asymmetry risk, analyze losses of capital market efficiency, and put forward comprehensive measures. I analyze risk premium in theory firstly. Use demonstration and experiment method to analyze the relation between information asymmetry and cost of equity capital on stock market. Then through a case, analyse risk-compensating rates in investment project value assessment. And then analyze the capital market efficiency loss and comprehensive measures. Finally point out the innovations, limitations.In the chapter III, I discuss how asymmetric information affects cost of equity capital. I explain from three aspects that information asymmetry needs to increase risk premium. Then I regard information disclosure level, information transmission mechanisms, information interpretation ability as three factors of asymmetric information. Finally my analyses focus on the value of the stock and project investment value assessment.Chapter IV is empirical research and experimental analysis. Empirical research is to probe into the relation of information asymmetry and equity capital cost in micro-level. The first important variable is information disclosure level; There are other variables including ownership structure, size of companies, system risks, and so on. Conclusions show that cost of equity capital will increase 0.11% when information disclosure level reduce 1 mark. Of course, I believe that the data is not appropriate in practice. Along with the development of stock market, we will acquire more years'data. Experimental analysis simulates a capital market. Three experimental designs include the country level and the company level. The experimental results support reverse relationship between information disclosure level,the ability to interpret information and equity capital cost.Chapter V is case analysis. The author introduce an example that a well-known international investment firm M invested a Photoelectric Ltd. Firm M was supplied with financial reports, inventory and fixed assets, financial forecasting and capital budget, and so on. The key is to acquire information and assess processing information quality. The case reflects that investors will require higher return according to risk in the cash flow of the project investment evaluation. In this case investors increased risk requirement from five aspects of information asymmetry. Total risk compensation is 1.75% from information asymmetry.In the sixth chapter, the author raises losses of capital market efficiency: high cost of utilizing capital, adverse selection, outflow of good resources and poor liquidity. Then I come up with a comprehensive management ideas: the regulatory organization build efficient system to enhance the transparency of capital market and improve investment environment; investors improve information interpreting capabilities to reveal and identify all types of risk; the company management improve management level, attach importance to investor relations, and strengthen financial warning analysis.The seventh chapter is basic conclusions and nnovations and limitations, and the author point out direction of future research. In this paper, the basic conclusion is as follows.1. In the capital market, information asymmetry comes from information disclosure level, information interpretation capacity, and information transmission mechanism. They are reverse with the degree of information asymmetry. Meanwhile ,the degree of information asymmetry is positive with equity capital cost.2. Information asymmetry exists in various levels, including country,industry and company level. Every level follows positive relation between information asymmetry and equity capital cost. In the company level, information disclosure is most important factor.3. In the micro level, the author weighs the degree of information asymmetry on the cost of equity capital in quantity. Result shows that the level of information disclosure reduce one mark, equity capital cost will increase 0.11%. It needs more evidences to testify whether the conclusion can apply to value assessment in practice.4. " Risk factors analysis method" can apply to adjust equity capital cost calculated by the capital asset pricing model (CAPM) and calculate the NPV. Analysis of information asymmetry should be included in risk factors.5.Too high or too low discount rates are detrimental to value assessment. There is no complete scientific method to calculate risk premium at present. Subjective estimates will be inevitable, but neglecting information asymmetry is likely to cause investors to overestimate net present value.6. Serious asymmetric information will lead to high cost of utlizing capital , which leads to efficiency losses of capital market. Regulatory organization, market investors and management need to make great efforts to improve the situation.The major innovations of this paper are as follows:1. Innovation of theoretical analysis. Three factors analysis is my first innovation. Non-systemic risk need supplement. At least 15 or more securities can be dispersed portfolio of non-systemic risk, so we should add non-system risk. We should not only price the systemic risk.2. Innovation about settings and measurement of variable in empirical study. The author consider a special system background in our country and design two variables:tradable shares to all of shares,10 largest tradable shares to all of the tradable shares. In the measurement of information disclosure, I used "Chinese listed companies confidence index" of the Economic Observation Research Institute which is independent research institutions. There are som limitations, however it is a better choice relatively at present. On the condition of lacking recognized authority assessment organizations , it is a good selection in present empirical studies in our country.3. Present a new method—"risk factors analysis". The method was applied to solve the problem that the degree of information asymmetry affects quantities of cost of equity capital. It is a feasible way to value assessments in stocks and projects investment.In this paper, limitations display as follows:1. There is no comparative analysis between listed companies and non-listed companies. In the value assessment of stock and project investment, the former is studied through empirical testing, and the latter illustrates mainly by case studies. I don't explain them detailedly in theory .2. The author has presented "risk factors analysis method", but fail to propose details of the scientific method. I am not able to design a general risk factor analysis table.3. In the empirical studies, the author selected confidence index of the Economic Observer Research Institute in 2004 listed companies in China. The assessment basis for the index is mainly financial reports in 2003, so the data appears to be earlier.The subject has just started in China. The paper "Use the little to get the big". In future research, the author will improve in measurement of information disclosure,three factors analysis,interpretation of game theory and contract theory,analysis of risk factors,capital market efficiency and the development of independent disciplines, and so on.