The Influence Of Ultimate Ownership Structure Legal Enviromrnt On The Cost Of Equity Capital

The cost of equity capital serving as the key reference of the investment and finance choice of the firm and the valuation of firm,is one of the hot issues of many researchers.So far,the study of the cost of equity capital pay more attention to following aspects:the measure of cost of equity capital and how corporate characters and corporate governance micro-factors influence the cost of equity capital.But they don't cover all the factors may affect cost of equity capital,few researchers study whether ultimate ownership structure and legal environment affect cost of equity,or combined internal corporate governance micro-factors with institutional environment to study the cost of equity capital.So, based on institutional background in China,Whether ultimate ownership structure and legal environment influence cost of equity capital and how? Whether legal environment affets the relationship between ultimate ownership structure and the cost of equity capital and how?Based on the above questions,this paper considers institutional background in China, and then theoretically deduces the influence of ultimate ownership structure and legal environment on the cost of equity capital, and the influence of legal environment on the relationship between ultimate ownership structure and the cost of equity capital. Controlling corporate character variables and corporate governance variables, this paper adopts balanced panel data of 775 Chinese non-financial listed companies from 2004 to 2006(2325 samples in all) and applies ordinary least squares (OLS) to empirically examine how ultimate ownership structure and legal environment affect firm's cost of equity capital and how legal environment affects the relationship between ultimate ownership structure and the cost of equity capital. The empirical evidence provided by the paper shows that ultimate ownership structure and legal environment do affect the cost of equity capital, what's more legal environment do affects the relationship between ultimate ownership structure and the cost of equity capital. To be specific, (1)comparing with non-state owned firms, the equity capital cost of state owned firms is lower; (2) the control proportion of ultimate controller have significant negative effects on the cost of equity capital, and the cash flow rights of ultimate controller have significant negative effects on the cost of equity capital. In other words, the higher cash flow rights is, the lower the equity capital cost is;(3) the better the legal environment is the stronger the protection of minority shareholders is,which can ease the agency conflict between the ultimate owner and minority shareholders, then reduce the cost of equity capital at the same time. And good legal environment can weaken the relationship between the ultimate ownership structure and the cost of equity capital.This paper expands the former studies about the corporate and cost of equity capital based on the previous papers and provides empirical evidence for the later researchers.At the same time,this paper give some suggestions on policy to help improve the corporate governance and improve the development of capital market in China.