China's Listed Companies, Equity Financing Preference Empirical Research

Corporate financing is very important to the management decision-making in modern enterprises. The research on corporate financing has been made by the financial academe in western countries since 1950's and has formed a mature system info about capital structure. Myers(1984) and Majluf(1984) proposed New Pecking Order Theory ,which states that under asymmetric information conditions firms have no well-defined target debt-to-value ratio, and that firms in general prefer internal financing(first), then external debt financing(second), and external equity financing(third). However, China's listed companies behave in a manner that doesn't follow the pecking order theory. They prefer external equity financing(first), then external debt financing(second), and internal fmancing(third).The paper analyzes empirically the financing choices of listed companies in China from two aspects. One is that we investigate a sample of 87 listed companies between 2000 and 2002 using a binary LOGIT model and a multinomial LOGIT model to determine if they follow the pecking order. The other is that we calculate the cost of equity financing using the method of average capital cost, which was put forward by Modigliani and Mille in 1966. Our study shows that listed companies' financing behavior isn't consistent with the pecking order theory. The cost of equity financing is higher than that of debt financing in 2002. Moreover, we conclude that the listed companies don't make rational financial decision from the view of maximizing the value of enterprise.We have found several notable causes for the equity financing preference as following: (1) unreasonable equity structure; (2) slow development of bond market; (3) faulty restriction mechanism of capital market. To perfect thecapital structure of the listed companies, we put forward some countermeasures from the perspective of policy design: (1) performing state-owned share reduction plan; (2) strengthen the construction of bond market; (3) improving the corporate governance mechanism to avoid insider control; (4) reforming the system of appraising corporate performance and perfecting the supervising mechanism of capital market.