The Rights And Interests Of The Cost Of Capital Effects Research Product Market Competition

The cost of equity capital is the required rate of return decided by investors, whichinvolves financing capacity, investment behavior, the distribution of profits andperformance appraisal from the microscopic point and relates to the efficiency of resourceallocation from macroscopic point.So the cost of equity capital is the core concept offinance.Many papers study the impact of internal and external governance mechanisms onthe cost of equity capital. Internal governance mechanisms consist of equity governance,board governance, management incentive and information disclosure. External governancemechanisms include the legal protection of investors, political association and so on.Howerver, as an important external governance mechanism, product market competitionalso can influence the cost of equity capital, which is ignored. Existing theses which studythe impact of product market competition on cash holdings, capital structure, investmentdecisions, dividend and other financial policies have confirmed its corporategovernance.Product market competition will bring the heterogeneity of risk, which affectsthe rate of return.Based on product market competition theory, principal-agent theory and assetpricing theory, this paper uses the sample of A-share listed companies from2003to2011and analyzes the product market competition’s governace effect and idiosyncratic riskeffect from two dimensions of industry competition and company’s market power.Theempirical results indicate that the degree of industry competition shows a significantcorporate governance effect and company’s market power shows a significant idiosyncraticrisk effect.That means the stronger industry competition, the lower the cost of equitycapital,but the holding rate of largest shareholder, board independence andtop-management compensation aren’t intermediate variables between industry competitionand the cost of equity capital;the stronger market power,the lower the cost of equity capital,idiosyncratic risk is an intermediate variable between market power and the cost of equitycapital.The relationship between industry competition and integrative governancemechanism is substitutive. The relationship between market power and integrativegovernance mechanism is complementary.This paper researches the relationship between product market and capital marketfrom capital market’s pricing function.Not only product market competition’s governancefunction is studied from the traditional point of view,but also product market competition’sidiosyncratic risk effect is discussed from the new perspective,which deepenscomprehensive understanding of product market competition’s impact on capital market.It’s necessary that reform of product market should take the different effect ofindustry competition and enterprise competition into account.Capital markets’ financingfunction should be considered during the reform of product market.