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Thinking of the cost of capital and financing preference of listed companies in China

Author: Anonymous From: www.yourpaper.net Posted: 2009-07-19 01:51:16 Read:
Author: Shun ultra Wong Wing Pak Yuan Jun summary: financing preference of China's listed companies and Western companies completely opposite. Awareness deviation connotation of investors' cost of capital as well as the relatively low cost of equity financing in the equity capital cost of soft constraints lead to the direct cause of the managers prefer equity financing of listed companies in China.
Keywords: financing preferences;
capital costs; financing costs

1 Introduction

In general, the means of financing of the company is divided into two parts of the internal source of financing (internal accumulation) and external financing, and the exogenous financing is divided into equity financing and debt financing (including bank loans and the issuance of bonds) two. Myers and Majluf (1984) pecking order theory of capital structure, and that the enterprises should be carried out for its own new project financing should follow the principle of the pecking order: First, internal equity financing (retained earnings), followed by debt financing and finally the external equity financing. This principle has been confirmed by the practice of Western countries, the financing of enterprises, Chinese enterprises have a sequence of different financing structure and financing preferences. China's listed companies generally have preferences for equity financing, performance rights or issue, the second choice is the debt financing preferred.
Reasons for China's listed companies reverse financing mechanisms, domestic scholars from all angles to do a lot of research work. Such as Ping Genfu through empirical studies pointed out that the main factors that affect the capital structure of listed companies have a company's profitability, firm size, the controlling shareholder; awake, Tan Zhuo split the equity structure of listed companies in China decided to equity financing preference; connected Jianhui Zhonghui Bo listed companies control mechanism of dislocation and the distortions of the corporate governance mechanism to generate the root causes of the company's equity financing preference; the Song Lin Liu Baifang that the key reason is that the connotation of the capital cost of many institutional fragmented.
Impact of China's listed companies financing preferences departure from the "pecking order theory" factor as the above scholars studied a lot, but the direct cause of awareness of bias and relatively soft constraints in the cost of equity capital, the cost of equity financing connotation of the cost of capital is low.

2 capital costs connotation recognize deviations

(1) the cost of capital to understand the deviation.
About the cost of capital is the most authoritative definition is given by the famous "New Palgrave Dictionary of the monetary and financial:" The cost of capital is the expected rate of return business assets, investors requested to maximize the value of the target company Manager of the cost of capital as the discount rate or the minimum rate of return of the evaluation of investment projects. "
In the financial management of the majority of our school textbooks from the use of the consideration angle to define the cost of capital, cost of capital is generally considered to raise and use funds to pay the costs, including the cost of fund-raising costs and the amount of funds used in two parts. Although there are a lot of people also come to realize that: the cost of capital corporate investors (including shareholders and creditors) rate of return on the capital invested enterprise requirements necessary; (2) the cost of capital, the essence of the opportunity cost.
But on the whole, China's financial management practices, awareness of the cost of capital are often based on the surface, just noticed that those companies paid out, tangible costs, ignoring the yield required by investors. The payment obligations of the company managers mistaken as a return for the investors the right to distort the nature of the cost of capital, and denied the relationship between the investors and the capital cost, it is mistaken for the final decision of the company managers is the cost of capital.
(2) the cost of capital connotation understanding of the deviation system analysis.
Portfolio theory and the CAPM model reveals the relationship between the risk of capital assets and the required rate of return for investors. Relative to the required rate of return, capital costs, to raise the the occupation fee cost of capital or the cost of capital is a unique product in the transition process in our system. Itself is also experiencing a scratch, never norms to regulate the process. In other words, the deviation of our understanding of the connotation of the cost of capital is the product of China's enterprise reform path changes.
In the planned economy era, the "witch hunt" because of the long-term fiscal funding cost of capital does not exist in any form. In 1984, China implemented a "Bo Gaidai" reform. Since then, the state-owned enterprises began to consider raising funds for fees and occupation fee. But this absence of owners scenarios the occupation fee raised the cost of capital and mature capital markets required rate of return on the capital cost nothing in common. Market because the banks do not provide loans, the ultimate owners of the creditor and the debtor are state financial enterprise natural brazenly chase bank funds. Raise capital cost of the occupation fee revealing his soft constraints, this soft constraints and finally the state-owned banks overwhelmed, the state had to seek new financing channels for state-owned enterprises. China's Shanghai and Shenzhen securities market was established in 1990, and logical evolution from the state-owned listed companies to raise funds from the stock market as a national capital free add look, making the funding of alienation for misappropriating the binding so that the cost of equity capital not as good as the binding of bank loans. Necessary rate of return on the cost of capital is very different so soft constraints state of the equity financing for operators, with hard constraints of modern financial theory. Soft constraints of the 3 listed companies the cost of equity capital under the relatively low cost of equity financing

According to modern financial theory, the cost of equity capital several calculated as follows:
(1) The capital asset pricing model. Derived in some strict assumptions on the basis of the capital asset pricing model, which is widely used in the practical application of the developed countries, investment appraisal and fund management. Its content can be simply stated as: ordinary shares of the expected rate of return equal to the risk-free rate plus a risk compensation formula is expressed as:
Re = Ri = Rf i (Rm-Rf) (1)
Where, Ri is the expected rate of return, Re for ordinary shares in the cost of capital risk-free rate, Rf representatives, Rm is the expected rate of return of the market portfolio, i is the sensitivity to changes in risk assets on the market.
(2) Bond yield plus a risk premium. The formula for
The Re = Long-term liabilities interest rate risk premium (2)
(3) The dividend yield plus a fixed growth rate
Re = D1/P0 g (3)
Where: g dividend growth rate, D1 represents the first year of the expected dividends, P0 said the stock
Above formula can be deduced a formula often used:
P0 = D0 (1 g) / (Re-g) = D1 / (Re-g)
Three equity cost of capital of the modern financial theory community Universal formula can actually be summarized ideas: formulas (1) and formula (2) for the two calculations is standing investors in the shareholder point of view of the requirements of capital markets investment's risk premium. The formula (3) both return for the investors rate corporate executives pay dividends and other expenses. In order to distinguish the real cost of capital, in order to better reveal the financing preference of listed companies in China, this paper calculated from the managers point of departure in this "raise and use funds to pay the price" referred to as the financing costs.
Financing costs from the point of view of the company's managers to calculate the cost of financing, refinancing of company managers practical considerations and the cost of the actual pay; while the cost of capital is measured from the point of view of corporate investors yield both fundamental is not the same thing, but they are also there is a close relationship: In some cases, investors have a strong awareness of the cost of capital to be able to stick to their investment rights, you can hard constraints on the formation of the company's managers, so the cost of capital In some cases, financing costs and capital costs are not equal financing costs and financing costs consistent with company managers will tend to consider refinancing necessarily directly equal to the cost of capital; If the company is a non-value investment-capital market, that investors chase price difference is much greater than the desire to get value in return, then the investor's cost of capital for corporate managers is virtual or soft constraints , when the equity cost of capital and financing costs will be severely fragmented. Thus, the equity financing of the Company's financing costs may be far less than the cost of equity capital, or even zero. For example, China is belonging to a non-value type of capital market investment.

4 countermeasures and suggestions

(1) The listed company should gradually establish the concept of the cost of capital.
At present, China's capital market is far from perfect, the cost of equity capital does not have a hard binding is very low, making the cost of equity financing, equity financing to become the preferred mode of financing of the listed companies. However, the low cost of equity financing this too is only a short-term phenomenon, as China's securities market, capital market gradually matured and norms, this situation will eventually change, the cost of equity capital will eventually become a hard constraint. A negative impact on short-term rapid capital expansion will company funds, resource use efficiency, equity agency costs as well as managers supervision and management, and may cause adverse changes to the performance of the company. Therefore, listed companies should try to establish the concept of the cost of capital, encourage enterprises to establish business philosophy to create market value for our shareholders and the financial goals of maximizing shareholder value, corporate health and sustainable development.
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