Political Connection, Government Intervention And The Cost Of Equity Capital

China is in the stage of market transformation and the government has verylarge impact on the market, there are many studies and reports show thatChina’s large number of corporate directors, executives there are governmentbackground, and this trend is still evolving. For businesses, governmentbackground is a good resource, which companies can not only use to getsome preferential policies, but also past a reputation for information to investors.However, the different ownership of the enterprise may making the performanceof the role of political association is not the same in different enterprise. Thus, to doresearches on the problem of a difference in thenature of ownership under political relevance of the enterprise and the cost of equitycapital has certain significance.Government intervention play the role of economic functions in the country’seconomy operation, which promotes good market to grow, regulate market healthyrun, and society in general to regulate and control. Grabbing hand of governmentintervention theory has existed for a long time, many documents from theperspective of privatization to make empirical studies and confirmed that thegovernment intervention on the enterprise caused inefficiencies. Based on the studyof government intervention affecting cost of equity capital of the enterprise andbased on the degree of intervention by the government of the enterprise grouping ofenterprises in different conditions, we make research of government intervention,political connections and corporate equity capital costs.In this paper, we use a sample of all the A-share listed companies between2007and2009which have been issued rights and within two years after the allotment orissuance of such equity without refinancing, excluding the ST, ST*enterprises andenterprise data is incomplete. By using three-stage residual Discounted ResidualIncome Model(GLS) to calculate the cost of equity capital, we use the multiplelinear regression analysis to make empirical analysis. We explored and researchedthe political connections under different nature of ownership, the governmentinterference with business in the relationship between the costs equity of capital.Our results show that:(1)The political connections associated a significantnegative correlation with the equity cost of capital, and the ratio of the non-state-owned enterprises in the local state-owned enterprises and centralstate-owned enterprises have better performance, which indicating thatnon-state-owned enterprises can establish the political association to reduce the costof equity capital.(2) Companies which high subject to government regulation thanthat low-subject have a higher cost of equity capital, which indicates that thegovernment’s "predatory hand" at work and the government intervention increasedthe unpredictability in business behavior and environment, thus leads to increase theoperational risks.(3) In low-regulated companies, political connection on the cost ofequity capital have a more significant effect. This shows that the political connectioncan offset some of the impact of government intervention, to lower the cost of equitycapital of enterprises in government intervention, but the impact of governmentintervention is still stronger than the influence of political connection that stronggovernment intervention in the environment did not play a good role in making thebusiness environment in the high government intervention, political connection didnot significant reduce the cost of equity capital, whereas in the case of lowgovernment intervention, have better performance.This study has some exploratory, possible innovations include: the researchmethod, the definition and measurement of variables may be an innovation of thispaper. Firstly, the existence of the political background of the enterprise definedconsidering all the enterprise executives, directors, which are more completely;Second, to define government intervention we dividing whether enterprise has beenregulated industries to determine their affected by the strength of governmentintervention, in a certain sense, to improve the predecessors who use re-use surveydata defects. Once again, the measure of political connection, in order to overcomethe deficiencies dummy variables, this article will follow the administrative level tomeasure the political connections, which are better focus the political strength ofconnections of the enterprise equity capital costs. In the research perspective andcontent, the current domestic and international research on corporate politicalconnections has not been involved in different nature enterprises’ politicalconnections affecting equity cost of capital comparative study; this paper research inthis area has a certain novelty.