A Study On The Relationship Between Equity Structure And Equity Capital Cost Of Listed Companies In China

Since the establishment of Shanghai and Shenzhen stock exchange in 1990, the securities market in our country has gradually been back on track. It’s worth mentioning that the public market financing has become one of the most important channel for enterprise’ s financing. At the same time, the stock market investment has also become an important choice for investors. For investors how to make decisions in the stock market, which means measuring the risks and profits in the uncertain capital allocation situation, is a key factor in investment.The cost of equity capital is the minimum accepted returns for investors, and is also the capital of public company for raising funds by issuing shares. Therefore, the cost of equity capital is an important indicator which exerts a big influence on the enterprise’s financing activities and values.The arrangement of the equity structure of an enterprise is the core issue of the company management. As for the governance mechanism in public company, the lowering of the cost of equity capital, which even though is not the most significant point to consider, is an indispensable factor in the decision of the equity structure. In other words, the relation between the equity structure and the cost of equity capital actually decides whether the company could satisfy the governance mechanism and minimize the equity capital at the same time in the market financing. However the previous studies on the relationship of equity structure and the cost of equity capital are relatively few, so this thesis attempts to combine the two factors together to study how the equity structure affects the cost of equity capital, and how to lower the cost of equity capital by adjusting the equity structure to increase enterprises value.At first, this paper has a detailed classification and review of the existing literature of the equity structure and the cost of equity capital. And then, the thesis discusses the relationship of the equity structure and the cost of equity capital through leaning form the opportunism of investors, the theory of principal-agent and the information asymmetric theory, and puts forward the correlative hypothesis on the basis of these theories. Through collecting and sorting out the relevant statistics of non-financial companies in Shanghai and Shenzhen A-stock markets during 2012 to 2014, this paper processes a descriptive statistic analysis of the status quo of the equity structure and the cost of equity capital. At last, by using the SPSS, this thesis chooses the relevant indexes from the perspectives of the concentration degree of shareholding, the equity restriction ration and the equity property to carry out a regression analysis of the cost of equity.This paper has the following results: 1.The empirical results shows that there is an insignificant positive correlation between the concentration degree of shareholding and the cost of equity capital, which means that the highly-concentrated shareholding company can reduce the cost of equity capital through lowering the degree of shareholding concentration. However, for the relatively concentrated shareholding companies, this method does not have a significant effect. 2.The relationship between the equity restriction ration and the cost of equity capital is significant negative. 3. For a company in which the equity property is owned by a state, the cost of equity capital is much lower than a non-state owned one. As a result, a public company can reduce its cost of equity capital by optimizing its equity structure.Different from the previous studies, the innovation points of this thesis are: 1. The paper conducts a detailed analysis of the relationship between the equity structure and the cost of equity capital based on the theoretical and empirical studies, which is different from the past separated studies of these two factors. 2. In the empirical study, this paper explains the variables from a multi-perspective which includes the concentration degree of shareholding, the equity restriction ration and the equity property; in the choice of the index of the explained variables, the previous studies generally tend to use the CAPM model, but this paper adopts the PEG model to calculate the cost of equity capital which is more suitable for the capital market in our country and has a higher level of precision.