An Analysis On Equity Preference And Cost Of China's Listed Companies

The question of the preference and the cost of equity financing has become the focus of the capital market in the early 21st century in China. Myers and Majluf(1984)'s Pecking Order rule first brought the asymmetry information to the financial theory. The PO rule argues that firms will act on the strict Pecking Order of the internal financial slacks, the secure debt, and then the external risky debt when they have to finance funds from the market. Since the severe asymmetry information problem exists, managers with the existing shareholders'benefit maximization will seldom do this. The mainstream of domestic research believes that the PO rule is a universal result so that the equity preference of China's listed companies should be criticized. With this background, the paper firstly measures the financing preference and the equity cost of China's listed companies. Comparing to the U.S. stock market, the detailed analysis results show that there is a deviation between financing preference and cost. Then, the paper gives the theoretical study of the true financing preference of the firm. When the distribution of information is asymmetric between the different debt-holders, and when the agency cost exists, the PO rule can't explain the true financing preference of the firm. So the deviation above is rational and the PO rule itself is not proper to explain the financing behavior of China's listed companies. In the conclusion, the paper explains the relationship between the costly equity cost and the financing preference from the aspects of financing cost, bankruptcy risk, debt capacity, agency cost and corporate control and then puts forward some useful suggestions.