Research On Relationship Between Audit Opinion And The Cost Of Equity Capital From The Perspective Of The Characteristics Of Ultimate Controller

Scholar’s research shows that equity financing preference generally exists in China’s capital market, so the cost of equity capital as the cost and price of equity financing for enterprise becomes one of hot topics of common concern of theory and academia. From the perspective of the investors, it is the rate of return to investors who buy shares according to the information required. Audit opinion is the result of verification and supervision on enterprise’s financial information by independent third party. It’s reliable information which can be obtained by investors, so there is no doubt that it becomes an important reference basis for them to make investment decisions. The audit opinions of different types show different signals to investors and have distinct impact on the reputation of the enterprises, which make investors require different rate of return. Then, they make a difference in the cost of equity of the enterprises. In addition, based on special institutional background in our country, the controllers of different characteristics possess different power and resources and have distinct motives and behavior characteristics, which can lead to different economic consequences. Thus, whether the ultimate controller’s characteristics impact the relationship between the audit opinion and the cost of equity capital is an issue which is worth further discussing.In this paper, the research hypotheses are put forward by reviewing the related literature and based on the information asymmetry theory, signaling theory and the reputation theory, then, this paper establishes the empirical model. After controlling the firm size, business growth, the first big shareholder’s stake, the account of long-term asset, financial leverage, profitability, business risk and the turnover of asset related research variables and measuring the equity capital cost using the Easton model, by taking 3853 A shares of non-financial listed companies in Shanghai and Shenzhen Stock Exchanges from 2010 to 2014 as research samples, this paper identifies whether the types of audit opinion have impact on the cost of equity capital and whether the characteristic of ultimate controller influences the former. The conclusions are as follows: firstly, the audit opinion types affect the cost of equity capital of enterprise. When the enterprise is issued by non-standard audit opinion, the cost of equity capital will increase. It’s because non-standard opinion published transmits a negative signal to investors and damages the reputation of the enterprises, then the investors demand more return on investment. Secondly, the characteristic of ultimate controller has an effect on the relationship between audit opinion and the cost of equity capital and it affects the pricing function of information risk to a certain extent. The characteristic of ultimate controller as state-owned can relatively reduce the impact on the cost of equity capital of non-standard opinion published. That is when there are two types of enterprises are issued non-standard audit opinion, the cost of equity capital of enterprises whose ultimate controllers are state increases less than that of the enterprises owned by non-state after controlling the conditions.According to this article’s research conclusion, this paper puts forward the following suggestions: firstly, the government should transform the role and perfect the function; secondly, strengthening supervision and improving the visibility of audit failure; thirdly, formulating and perfecting the relevant laws and regulations in order to make investors get protection; fourthly, enterprises should strengthen the internal corporate governance. Finally, this paper shows the deficiency of study to provide reference for the further research.