Equity Balance、investor Protection And The Cost Of Capital

In February2010, the Minority Shareholder Protection Committee released the2009Minority Shareholder Protection Evaluation Report. The report shows that the level of shareholder protection among the300largest companies in the Shanghai and Shenzhen stock market was a fundamental failure. This led to extensive discussions about the protection of the interests of investors. The interest of investor protection has always been theoretical in circles at home andabroad, especially for emerging market countries. The international studies have shown that the better the investor protection of a country or region and the more developed the capital markets, the greater their ability to resist financial turmoil. In mature securities markets of developed countries there are many safeguards protecting the interests of investors, yet in China’s rapid economic development, such protections have a long way to go.At the same time, improved corporate governance has always been the focus of capital market research. Corporate governance includes not only the internal mechanisms of a corporation, including the board of directors and remuneration system, ownership structure and information disclosure, but also the external governance mechanisms including control over the markets, and legal protection of investors. Internal governance mechanisms have a direct affect on corporate governance and while external governance mechanisms have an indirect affect. Corporate governance is largely a set of institutional arrangements to protect outside investors from internal conflicts of interest. Effective corporate governance focuses not only on maximizing company performance but also on protecting investor equity, thereby making investors are more willing to invest in enterprises and increase their value.This ensures the stability of capital markets and stimulates economic development. Due to the nation’s financial dominance, the ownership structure of Chinese companies has been the subject of much criticism and has encouraged research on equity balance as an effective means of corporate governance in order to reduce the cost of capital and provide the effective protection to investors. The study serves as an important reference point for financial reform. In the1990’s the subject of investor protection had significant development internationally. LLSV (2000) developed many perspectives about law and finance. The study supports the view that concentrated ownership structure can replace investors’ legal protection. From the point of view of private owners, concentration of ownership is not in conflict with investors’rights but is a response to their lack of legal protection.When the controlling shareholders offer inadequate legal protection to investors they help minimize the stock price and encourage further investment, thus enriching the value of their own investment. As a result, many studies agree to a similar ownership structure.So, how about the relationship between equity balance, investor protection and the cost of capital? The answers to these questions can help us to understand current corporate governance and promote the establishment of investor protection mechanisms.This article is divided into five parts and revolves around the development of corporate governance theory as it relates to the interests of investors. The main content can be summarized in the following sections:Part Ⅰ:The significance and background of the study. This part illustrates motivation, purpose and structure, and discusses how the research was developed.Part Ⅱ:literature review. This part illustrates relevant domestic and foreign literature, then analyzes and compares them.Part Ⅲ:This part illustrates the theoretical perspective of corporate governance theory relating to investor protection. It further discusses the legal issues regarding investor protection. Ownership structure and investor protection are two key aspects. This section seeks to put equity balance, investor protection, and the cost of capital into a framework for theoretical analysis and to lay the foundation for the empirical research of this article.Part Ⅳ:Empirical research. This part illustrates descriptive analysis of the collected samples, descriptive analysis, and multiple regression analysis of equity balances. Investor protection and the cost of capital are also covered here.Part Ⅴ:Conclusions and recommendations. Based on the hypothesis and the empirical results of this study, this part makes a comprehensive conclusion, offers recommendations, and finally, puts forward possible topics of future research.Throughout the study, this paper makes a contribution in the following aspects:(1) Established a theoretical analysis framework based on investor protection. Most research has focused on equity and firm performance, but fewer articles research the relationship between equity balances and investor protection. This paper puts equity balances, investor protection and the cost of capital into a framework for theoretical analysis.(2) The ideas discussed here will be based upon the principles of micro economics. Existing studies are mostly from a macro perspective and examine theimpact of law on the protection of investors. The innovation of this paper is toexamine the degree of protection of investors in the context of the same system from a micro point of view.(3) Nonlinear relationship between the degree of equity balance and investor protection, and the optimal equity balance interval. The study finds that the relationship between equity balance and the degree of investor protection has a nonlinear relationship with an inverted U-shape.(4) Empirical research examines the impact of equity balance and investor protection from qualitative and quantitative aspects.Meanwhile, because the writer’s knowledge and ability is limited this research also addresses the following inadequacies:(1) This sample of empirical analysis is based upon3023samples selected from a set of5216. As nearly two-fifths of the samples are excluded from the scope of this study it is likely to affect its accuracy.(2) In this paper, the adjustments made to the investor protection index are done post evaluation. The concepts relating to investor protection cover a large and complex system. Existing studies are mostly of ex-post evaluation measure. Future research can explore a more comprehensive study about investor protection. (3) The reliability of the measure of investor protection is based on the information disclosed herein. The imperfections of the Chinese stock market will also affect the accuracy of information disclosed herein. Only real information helps investors, so only the investor protection measures that are based on real information have meaning.(4) From the end of2007the U.S. financial crisis had a great impact on the Chinese stock market. China’s stock market declined in2008and2009.(5) The sample from2008through2010actually has a certain degree of particularity which this article does not address separately. This may affect the comprehensiveness of the empirical results.