Monetary Policy And Cost Of Capital

Cost of capital is a core concept in corporate finance,which is related to investment and financing in a company.The cost of capital has two concepts: first,it is the standard of choosing investment projects in perspective of companies.Only the expected rate of return is greater than this value,the project is valuable;second,standing on the investor's point of view,it represents an opportunity cost and the necessary rate of return of investors for the firm's future expectations.The cost of capital is one of the focuses in the financial field.The importance of the impact of macroeconomic factors on the investment and financing of enterprises has been reflected in the literature in recent years.However,how monetary policy influences cost of capital specifically,which needs comprehensive details.Monetary policy is an important economic policy of the government to carry out macroeconomic regulation and control.The purpose of monetary policy is to control the momentum of rapid economic growth,stimulate the sluggish economy and make the domestic economy healthy and stable development.Changes in monetary policy will lead to changes in interest rates and credit scale,which will increase the market uncertainty and affect the cost of capital of enterprises.Therefore,the study of the impact of monetary policy changes on corporate capital costs can help understand the impact of micro-economic behavior of macroeconomic policy factors,but also to grasp the microeconomic effects of macroeconomic policy changes.In this paper,we choose the annual data of 2004 to 2015 A-share listed companies for the study.In order to get results more reliable,the article uses the one-year loan interest rate and the general monetary supply as a measure of monetary policy variable.We propose hypothesis and set up model to study the impact of changes in monetary policy on equity capital costs,capital cost of debt and weighted average cost of capital respectively.The empirical results show that:(1)When the People's Bank of China adopts the expansionary monetary policy,the cost of equity capital,debt capital and the weighted average cost of capital will decrease;during the tight monetary policy period,equity capital costs,debt capital costs and weighted average cost of capital have a rising trend.(2)The capital cost of enterprises with different property rights is different from that of different monetary policy periods.In the period of monetary tightening,the cost of equity capital of non-state-owned enterprises has a significant decrease compared with state-owned enterprises;state-owned enterprises and non-state-owned enterprises will change the ratio of external financing(equity financing and debt financing)to adapt to the monetary tightening period.They will adjust the corporate capital structure to better deal with the negative impact of tightening period.The conclusion of this paper shows that the conduction channel of monetary policy based on price is effective,and China should continue to reform the interest rate marketization and pay attention to the role of interest rate monetary policy in macroeconomic regulation in China.Enterprises should make full preparations for changes in monetary policy and make timely adjustments to the capital structure of enterprises.In view of the reaction of the capital cost of different property rights companies to the change of monetary policy,China should pay attention to the rational distribution of external financing resources in the financial environment and promote the stable and healthy development of non-state enterprises.Government can implement different monetary policy to state-owned enterprises and non-state-owned enterprises.