Income Smooth And Financing Cost Of Equity

The correlation between income smooth and financing cost of equity is the key concern of the article. Some has taken income smooth as the reflection of management expectation. The smoother the income, the lower the financing cost of equity will be. However, others have viewed income smooth as earning manipulation, which will be punished by the investors by increasing the financing cost of equity. After comprehensive analysis of A stock listed companies, we have seen the existence and persistence of income smooth.Compared with United States, the average earnings of China's listed company is smoother, while it is more volatile than European Continent. The article has taken income smooth, market volatility, financial risk, tangible asset-to-debt ratio, company scale, stock liquidity, book-to-market ratio, asset turnover and percentage of stock held by large shareholder and institutions as independent variable. Considered the endogeneity of income smooth,2SLS model is applied. The results have shown positive correlation between financing cost of equity and beta, assets turnover, and negative correlation between debt-to-asset ratio, company scale. At the same time, the smoother the income is, the lower the financing cost of equity. On the other hand, tangible asset-to-debt ratio, stock liquidity, book-to-market ratio and percentage of stock held by large shareholder and institutions have little influence on the financing cost of equity.According to the method applied to variable calculation, the conclusion would be effective for companies with analysts follow up. The author has taken one step further to prove that with more analysts follow up, the income would be smoother.