The Evolution Of Accounting Standards, Status Of Shareholders And Cost Of Equity Capital

China as the fastest developing country, unswervingly observe the market economic rules, has achieved very remarkable prosperity and harmony. Undoubtedly these achievements owes to the innovations and explorations of our people. The most important economic innovation is the transition from the planned economy to market economy which contributes the evolution of the accounting systems. For adapting to the economic systematic transition, China’s treasure department led our accounting system to evolve from the domestic to the international paradigm, from the rule-guidance to principle-guidance. And we Chinese proves a unbelievable rule, as the most populated country our institutional system evolution can coincide with our economic system evolution, which can be interpreted as the setbacks emerged in developments can be dissolved in developments. On June the 25th,2006 the treasure department established the CAS (Chinese Accounting Standards), which was mandatorily adopted on January the 1st 2007, and which announce to the world China had achieved the basic convergence with the IFRS. During 2008, the world economy plummeted to depression owing to the financial crisis. This precipitated the steps of the convergence of the accounting standards to the IFRS globally. That raises the question whether the adoption of IFRS can be a good way to lower down the asymmetry between the entrepreneurs and their investors?A different scholar in different perspectives studies this question and publishes many papers to prove. This paper studies whether and how Chinese’s mandatory adoption of new accounting standards CAS reduces the cost of equity capital in the perspective of structure of shareholders under china’s institutional circumstances.For answering whether and how China’s adopting of CAS reduce the cost of equity capital, theoretically this paper modify the assumptions of Richard Lambert et al(2007) model that is consistent with CAPM and deduct the model to demonstrate that the different structure of shareholders will have a significant impact on cost of equity in two ways. One way occurs because different kinds of shareholders have different aims in investment which will be illustrated by their Arrow-Pratt coefficient of absolute risk aversion. The other occurs because role of shareholders play will affect the quality of their information about future cash flows. The newly adopted CAS reduces the cost of equity capital undoubtedly, but the economic levels of the reduction results from different coefficient of absolute risk aversion of the shareholders. Empirically, this paper uses the panel data 2004-2009 3years before and after the mandatory adoption to verify the theoretical predictions.Finally this paper gives some political suggestions for the evolution of CAS and some expectations about the future studies.This paper makes some minor contributions and still has some foibles. Firstly, this paper answers whether and how China’s adopting of CAS reduce the cost of equity capital and gives a comparable research with the International research. Secondly, this paper triumphantly connected the main paradigms of positive study, the theoretical study and empirical study. Thirdly, this paper studies the cost of equity capital and the adopting of CAS with considering the China’s structure of shareholders under china’s institutional circumstances. Fourthly, this paper highly scrutinizes how the adoption of CAS can be interpreted by the investors, and what kind of effects can be detected by our empirical studied.However attention must be paid, there does exist some foibles future study. Fist this paper only studies one method to estimate the cost of equity capital, the result won’t be as robust as what Siqi Li (2010) did. Secondly this paper united three classic models to interpret the relation between accounting evolution and cost of equity capital on the perspective of the status of shareholders, however fail to give out a brand new model. Thirdly, the empirical evidence needs some robust analysis. Fourthly, this paper can not escape the gravity of the disadvantages of empirical studies. This contains this paper can not answer whether my vehicle of these variables can totally carry what my paper engaged in studying. Fifthly, this paper can not build a perfect empirical model to interpret the cost of equity capital.