Research Of Influence Factors To The Cost Of Equity Capital In Listed Companies

The cost of equity capital needs to be estimated when corporate managers want to decrease their financing cost or when investors make decisions in equity investment. Based on large quantities of previous theoretical research and empirical work, this paper tries to provide some references to the improvement of computation model for the implied cost of equity capital.This paper chooses the three-stage residual income model to estimate the cost of equity capital. Then after a comprehensive and intensive analysis of the influence factors of the cost of equity capital in Chinese listed corporations, this paper presents a novel multi-influencing-factor model.The results of this research show that: 1) the residual income model is effective in Chinese stock market because compared with other estimation models, this model can confirm value in earlier time without so much reckons on the estimation of terminal value especially in the emerging markets; 2) the explanation power of traditional Beta coefficient is just 12.6% in 2005, while the value of 2004 and 2006 are all below 10%. The influence of Beta coefficient is not stable as well, so the calculation using this factor solely could cause error. After a comprehensive and intensive analysis of the influence factors of the cost of equity capital in Chinese listed corporations, this paper introduces the multi-influencing-factor model for 2005, which shows the strongest explanation power of 54.7%; 3) analysis of influence factors in different cross sections show that the influences for cross-sectional cost of equity capital made by book-to-market ratio(BM), earnings forecast volatility(EFD), industry factor(INDUS) and financial leverage(EM) are stable. BM,EFD,INDUS are important influence factors because the integrated explanation power of them are all beyond 45% in cross section of 2004,2005,2006. So the cost of equity capital could be similarly and indirectly estimated by the calculation of BM, EFD, INDUS, and useful decision considerations could be supplied.