Diversified Equity Investment And Bond Financing Costs

Pyramid shareholding structure and its impacts on the corporate finance have been an important issue in the fields of finance and financial studies, however, the existing research is aimed primarily at the pyramids and the actual controllers of listed companies, assuming a single corporate structure of listed companies, or assuming that the parent and subsidiary companies are a combined subject. These researches ignored the structural differences between equity control of listed parent company and its subsidiaries, which made it difficult to explain the listed company’s financial policy choices is the result of equity control of listed companies, or the structure between the parent and subsidiaries. China’s listed companies are increasingly leading diversified equity investment characteristics, namely the Company’s equity investment in the parent company accounts for a large proportion of assets of the parent company, and its subsidiaries’business sectors and geographical distribution are diversified. How diversified equity investments that affect the cost of debt financing mechanism is unclear.In order to know the impacts of diversification strategy on bonds financing costs, this paper examines the difference between the diversified equity investment and the normal diversification. The results suggest that:①Although the company’s diversified operations can reduce overall debt risk, however, this result is more obvious in diversified equity investment companies.②When issuing corporate bonds, diversified equity investment enterprises can obtain a lower bond spreads compared to non-diversified equity investment company.③Further study found that unrelated diversified equity investment can get a lower bond spreads compared to the relevant diversified equity investment companies.④In addition, we also found that the shareholding structure of the company will make impact on the diversified equity investment companies. When issuing corporate bonds, the bigger the allocation of cash-flow rights and decision right, the bigger bond spreads. This study shows that under the conditions of the emerging markets, diversified equity investment can play a stronger effect of internal capital markets, risk diversification effect, and reducing the corporate bond financing costs.Innovation:①This article is different from the existing major studies of bond financing costs and financing risk for the single enterprise, this article put the relationship between the pyramid diversified conglomerate’s equity investments and debt financing into the overall analytical framework. Compared with the single operating companies, diversified investment allows the company to be more flexible and adjust its overall liquidity of the Group. The adjustments between different subsidiaries can maintain the stability of the overall liquidity of the Group to reduce operating and financial risks, thus improving the ability to bond financing.②Our country’s corporate bond market starts late, few domestic research focus on the cost of corporate bond financing measure. The existing research’s is based on the foundation that bank loans are the main source of corporate debt. And the proxy variable includes interest expense and net financial expenses. In fact, the creditor banks’and bondholders’ cost requirements are different. Foreign bond market started early, there are a wealth of research focused on the bond interest rate differentials, Chinese bond market with the past two to three decades of development give a good start to begin to study with bondholders’ spreads.