Is Smooth Earning Able To Reduce The Cost Of Equity Capital

This paper investigated the relationship between smooth earning and the cost of equity capital. Use marginal utility and cost-benefit theory, this paper proved that, to some extent, corporation managers, shareholders, creditors and government regulators allow income smooth’s existence. Which is one of the reasons that smooth earning widely exit in the enterprise. And this paper also proved that smooth earning could only reduce the cost of equity capital in a short time, but could not have an impact on the cost of equity capital in long time.This paper found that, Average, smooth earning widely present in China’s listed companies while calculated954companies’ smooth earning in A-share market. But different industries showed different extent of smooth earning. The smoothest is the financing, construction and real estate industry, and the lowest smoothing industy is the agriculture, forestry, animal husbandry and fisheries industry.Further, use empirical analysis, this paper investigate the relationship between income smoothing and the cost of equity capital. And found that, there is no correlation between income smoothing and the cost of equity capital. When join the industry variables, this paper found that in construction, wholesale and retail industries, there is correlation between income smoothing and the cost of equity capital in the0.05significance level, but not found correlation between income smoothing and the cost of equity capital in other10industries.The article also analyzed other variables that may affect the cost of equity capital and found that, stock turnover, book-to-market value ratio and p are the most Influential variables. But unexpected, the paper found there was a positive correlation between firm size, stock turnover and cost of equity capital; and there was a negative correlation between debt ratio, bankruptcy costs and the cost of equity capital.