Research On The Impact Of Flood Disaster On The Implied Cost Of Equity Capital

There is a consensus that climate change may lead to structural changes in economic and financial systems.Foreign studies have shown that climate-related financial risks can affect economic and financial stability through physical risks and transitional risks.Physical risk refers to the risk that extreme weather events caused by climate change will cause direct damage to disaster victims.Transformation risk refers to the risk of asset depreciation caused by the change of low-carbon economic transformation policies,technological innovation and market sentiment.The flood,as one of the unusual weather events caused by climate change,is also the most extensive natural disaster in our country.Flood disaster is extensive,long-term and serious.This paper is interested in whether flood disasters can affect the implied cost of equity capital of listed companies through two channels: physical risk and transformation risk.The cost of equity capital reflects investors’ expectations of the future operation of an enterprise and also reflects the goal of maximizing the value of an enterprise.It plays a benchmark role in various decisions of a company,such as IPO pricing.In addition,the policy of "deleveraging" requires that equity financing replace creditor’s rights financing,and the cost of equity capital is an important factor that affects equity financing preference.Therefore,the study on the impact of flood disaster on the implied cost of equity capital can guide the IPO pricing of enterprises and provide reference for policy makers and investors.However,domestic research on climate-related financial risks and the cost of equity capital started late,and the measurement model of the cost of equity capital was chosen randomly.The economic impact of flood disaster was mainly studied from the macro level of consumption and investment,and the impact of flood disaster on the capital market and listed companies was not discussed from the micro level.Therefore,this paper focuses on the effect and mechanism of the impact of flood disaster on the implied cost of equity capital,the measurement model of the implied cost of equity capital and the moderating effect of the ownership nature of listed enterprises,the shareholding of institutional investors and the level of environmental information disclosure on the impact of flood disaster on the implied cost of equity capital.Based on the HVZ mixed section regression profit forecast model,the forecast earnings per share and stock price were substituted into Gordon model,GLS model,CT model,PEG model,MPEG model and OJ model to calculate the implied cost of equity capital of domestic non-financial and non-ST listed companies from 2006 to2020.The mean value of the implied cost of equity capital measured by six models is taken as the explained variable,and the disaster area and direct economic loss of the province where the listed company is located are taken as the core explanatory variable.The impact of flood disaster on the implied cost of equity capital is analyzed.It also examines the mechanism that flood disaster may affect the cost of equity capital by affecting the future cash flow and investor sentiment.This paper has important reference significance for subsequent research on climate-related financial risks and the cost of equity capital.The research conclusions of this paper include:(1)Flood disaster significantly increased the implied cost of equity capital of listed companies.As a new type of climate risk,flood disaster has pricing effect on capital market.(2)The flood disaster increases the implied cost of equity capital by reducing the company’s future cash flow and investor sentiment;(3)In the event of flood disaster,the implied cost of equity capital of state-owned enterprises is higher than that of non-state-owned enterprises.The higher the proportion of institutional shareholding and the higher the level of environmental information disclosure,the lower the implied cost of equity capital.(4)The effect of flood disaster on the significant increase of implied equity capital cost is not affected by the measurement model of implied equity capital cost.The innovation points of this paper are mainly reflected in the following three aspects:First,in terms of research issues,this paper studies the impact of extreme weather events caused by climate change on the implied cost of equity capital of listed companies.Traditional financial theory holds that climate-related risks can be eliminated through diversification,while the conclusion of this paper shows that climate risks cannot be completely dispersed,which will affect the implied cost of equity capital,and provides theoretical support for climate risk to become a new macroeconomic risk.It is of great importance to policy makers,business managers and investors.In addition,there is no domestic paper that directly links climate risk with the cost of equity capital of enterprises.The research in this paper enrichis the literature in the field of climate finance research.Second,in terms of research objects,this paper takes flood disaster as the main research object,and uses the ratio of the area affected by flood disaster to the total area of the province and the natural logarithm of the direct economic loss caused by flood disaster as the core explanatory variables to provide a new idea for measuring climaterelated risks.Third,there are innovations in research methods,which are reflected in the measurement of implied cost of equity capital.It is more accurate to use the profit forecast model to predict the future cash flow of enterprises than to directly use the analyst profit forecast.Moreover,the mean value of implied cost of equity capital measured by several measurement models is used as the explained variable,which can overcome the limitations of a single model.