Research On The Impact Of Environmental Uncertainty On The Cost Of Debt

Financing has an important role in achieving optimal allocation of resources for enterprises. There are two ways of external financing:equity financing and debt financing. In recent years, the securities regulators began to increase the intensity of supervision for equity refinancing, which resulted in a decline in the proportion of the equity financing. Debt financing has the advantages of lower cost of capital and available financial leverage income. As a basic financial concept, the cost of debt has a wide range of applications in the capital structure decision-making and investment decision-making. Scholars have analyzed the effect factors of the cost of debt from the perspectives of information disclosure, corporate governance, accounting conservatism and the nature of property right. Researches find that the high quality of information disclosure, good corporation governance, adoption of accounting conservatism and the state-owned property rights can reduce the cost of debt. However, they mainly study the effect factors of the cost of debt within the enterprises. There is little literature studies the effect factors of the cost of debt from the perspective of external environment.The external environment enterprises face has been more complex and volatile since the financial crisis began in2008. Compared to the past, the market has a higher degree of uncertainty. Environmental uncertainty is the unpredictable changes enterprises face, which reflects the degree of the unknown and turbulence of the business environment. It is stochastic in nature and cannot be easily predicted. The unpredictable behaviors from the competitors and customers would lead to uncertainty of the environment. For example, when consumer demand and competitors’ strategies change quickly, managers will be difficult to predict the customer needs and competitor behaviors, enterprises are in a high degree of environmental uncertainty. Previous studies have found that the environmental uncertainty has an important impact on the strategy formulation, operating management, corporate performance and earnings management. Higher environmental uncertainty will increase the difficulty of making decisions, reduce the business performance and increase information asymmetry between managers and shareholders. Also it will increase the level of earnings management. So, will environmental uncertainty affect the cost of debt? Scholars have studied the relationship between the nature of property right and the cost of debt. They found that the cost of debt of state-owned enterprises is lower than that of non-state-owned enterprises. If we combine the external environment with the nature of property rights, whether state-owned nature of property rights can help enterprises mitigate the impact of environmental uncertainty on the cost of debt?The research selects all A-shares listed in the stock markets of Shenzhen and Shanghai from2008to2012as samples and studies the impact of environmental uncertainty on the cost of debt. By means of OLS regression testing, we find that the higher degree of environmental uncertainty leads to the higher cost of debt. This shows that when doing the risk assessment, creditors will take the external environmental uncertainty into account. Higher environmental uncertainty, which means higher risk, results in higher cost of debt. The study also finds that state-owned nature of property rights reduce the positive correlation between the environmental uncertainty and the cost of debt. This shows that state-owned nature of property rights can help enterprises mitigate the impact of environmental uncertainty on the cost of debt. When we take the governance into account for a further study, we find that governance can reduce the positive correlation between the environmental uncertainty and the cost of debt. This shows that good governance can also mitigate the adverse impact of environmental uncertainty on the cost of debt.There are mainly six chapters of this research:Chapter one is introduction. The introduction consists of four parts. The first part is a brief introduction of the research background and the points of study. In this part, I discuss the cost of debt and the environmental uncertainty by going through the relative researches and raise the points of the study. The second part is the research line, in the research line, I give a summary of the research ideas and framework. The third part is research methods, there’s a brief introduction of the methods used in this paper. The contributions of this study and the possible innovation are mentioned in the final part. Chapter two is literature review. The literature review can be divided into five main parts. In the first part, based on the pervious researches, I give the definitions of environment connotation, environmental uncertainty and the cost of debt. In the second and third parts, I review the literatures which discuss about the environmental uncertainty and the cost of debt. In the fourth part, I comb the researches about the environmental uncertainty and the cost of debt. The fifth part is a brief summary.Chapter three is the theory about the environmental uncertainty and the cost of debt. This chapter can be divided into two main parts. The first part is the theory about environmental uncertainty. I illustrate the source of environmental uncertainty based on the information theory and resource dependence theory. The second part is the theoretical basis of the effect of environmental uncertainty on the cost of debt, which includes risk management theory, asymmetric information theory and signaling theory.Chapter four is the theoretical analysis and research design. There are mainly four parts in this chapter. The first part is the theoretical analysis and research hypothesis. Firstly, we deduce that the environmental uncertainty has the effect on the cost of debt based on the information theory and resource dependence theory. Then we pose hypothesis one based on the risk management theory, asymmetric information theory and signaling theory:There’s a positive correlation between environmental uncertainty and the cost of debt. When we combine the external environment with the nature of property rights, we further pose hypothesis two: state-owned nature of property rights reduces the positive correlation between the environmental uncertainty and the cost of debt. The second part is the indicator I choose to measure the environmental uncertainty. In the third part, I introduce my empirical model and the measurement of every variable. The last part is the sample selection.Chapter five is the empirical tests and results analysis. This chapter consists of six main parts. The first part is the demonstration of descriptive statistics. In this part, the descriptive statistics of the total research sample and sub-samples divided based on the nature of property rights are demonstrated. By descriptive statistics, we test the relationships between the variables parsimoniously. The second part is the Pearson correlation matrix, in which the Pearson correlation coefficients between the variables are demonstrated. It’s the preliminary validation of the assumption. In the third part, by the means of independent-samples t-test, I prove that the environmental uncertainty and the cost of debt are different between the state-owned enterprises and the non state-owned enterprises. In the fourth part, the results of OLS multivariable regressions are demonstrated and the hypotheses are tested. In the fifth part, by the means of Principal Component Analysis, I compile a single composite index to rank firms’corporate governance levels. Meanwhile, I combine the corporate governance with the environmental uncertainty and study their effect on the cost of debt. In the sixth part, we replace the indicators of environmental uncertainty and the cost of debt for robustness testing. The results of robust tests are quite similar with the results in previous sections, meaning that my research is robust.Chapter six is the conclusion. Conclusion consists of three parts. In the first part, I make a summary of the results in this paper. The second part is the politic recommendations based on the research. Finally I point out the shortcomings and the future research directions.My study contributes to the relative fields in the follow three ways:First, my study finds that there’s a positive correlation between environmental uncertainty and the cost of debt. Unlike previous researches, this paper studies the factors affecting the cost of debt from the perspective of external environment rather than the perspective of factors within enterprises. The empirical results show that the uncertainty of the external environment will affect the ability of financing for enterprises, therefore, improving the response ability for external environment has a positive effect on the enterprises’financing efficiency. On the other hand, previous literatures study the effect of environmental uncertainty mainly from the perspectives of operating management, strategy formulation and corporate performance. However, this research studies the effect of environmental uncertainty from the perspective of financing, which enriches the researches of related fields.Second, this article combines the environmental uncertainty with the nature of property ownership. The empirical result shows that state-owned nature of property rights reduce the positive correlation between the environmental uncertainty and the cost of debt, which expands the researches about the nature of property rights and the cost of debt.Third, unlike previous researches, I combine the corporate governance with the environmental uncertainty for a further study, the empirical result shows the corporate governance can reduce the positive correlation between the environmental uncertainty and the cost of debt. This shows good corporate governance can help enterprises reduce the cost of debt. So enterprises should enhance the level of their corporate governance.