Ultimate Ownership Structure,Investor Protection And The Cost Of Equity Capital

Cost of equity capital is one of the hot and thorny issues to be solved in corporate financial area, which significantly influences corporate investment/financing decisions and valuation. Affected by various factors, cost of equity becomes extremely complicated, turning out to be a vital part of capital cost research.At present, researches on cost of equity capital focus on evaluation models, and examine corporate financial characteristics, macroeconomic factors, corporate governance, and institutional environment, which can potentially impact company’s cost of equity capital. Few scholars explore the cost of equity capital from the perspective of ultimate ownership structure, or combine with investor protection to examine the interaction of ultimate ownership structure and investor protection on cost of equity capital. So, in such an emerging market country with a special institutional background like China, will internal ultimate ownership structure of the company and external level of investor protection influence the cost of equity capital or not? Whether the relationship between ultimate ownership structure and the cost of equity capital is affected by the level of investor protection?In response to these problems and based on China institutional background, this paper firstly deduces how ultimate ownership structure and investor protection affect company’s cost of equity capital and whether the relationship between separation degree of controlling right and cash flow right and the cost of equity capital will be influenced by the level of investor protection. Then, this paper selects the GLS model to measure company’s cost of equity capital, controls related variables such as corporate financial characteristics and governance factors, applies panel data consisted of related continuously obtainable information of330Chinese non-financial listed companies dated from2006to2009(totally1320observations) as the study sample, uses a series of mixed models to empirically examine the relationship among ultimate ownership structure(including cash flow rights, the separation degree of control rights and cash flow rights, the nature of ultimate controlling shareholder), investor protection(legal institutions at the regional level) and cost of equity capital, and makes related robustness test. The results show that, ultimate ownership structure and investor protection do have an impact on the company’s cost of equity capital while the relationship between separation degree of controlling right and cash flow right and the cost of equity capital has difference with different levels of investor protection. Specifically:(1)Cash flow rights is remarkably negatively correlated with cost of equity capital;(2)The separation degree of controlling right and cash flow right is remarkably positively correlated with the cost of equity capital;(3)The cost of equity capital of companies that are ultimately controlled by state is significantly lower than those whose ultimate controlling shareholders are non-state-owned enterprises;(4)The higher level of investor protection, the lower cost of equity capital;(5)In the low level of investor protection area, the positive correlation between separation degree of controlling right and cash flow right and the cost of equity capital is significant, while in the high level of investor protection area, the positive correlation between separation degree and the cost of equity capital is not significant.This paper combines internal and external factors to explore the impact on cost of equity capital, expanding existing related research to a certain extent. It provides the empirical evidences for optimizing ownership structure, improving internal governance mechanism as well as external legal institution. Also it makes recommendations to beef up investor protection, promoting healthy and orderly development of capital market.