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Causes and Treatment of equity financing preference of listed companies

Author: HuangYiHong¡¡JiangQingJun From: www.yourpaper.net Posted: 2009-10-17 20:05:09 Read:
[Abstract] At present, China's listed companies making the choice of external financing, showing a significant equity financing preference phenomenon, many scholars as the starting point of the argumentation and analysis that the cost of equity financing is less than the cost of debt financing to equity financing costs is the direct cause of this phenomenon. I believe that only the cost of equity financing is less than the cost of debt financing as an explanation of equity financing preference surface. Analysis, argumentation, from a corporate governance perspective that the exploitation of the underlying causes of the cause of this preference is the largest shareholder of the small shareholders.
Listed Companies [J]; equity financing preference; causes; Countermeasures

I. Introduction

Currently, listed companies in China's long-term sources of funds include two channels of internal financing and external financing. Internal financing mainly refers to the use of the company's undistributed profits to finance. External financing direct financing and indirect financing such as bank loans and issued bonds and stocks. Which bank loans are a common way of indirect financing. Compared with the direct financing, bank loans with a relatively simple procedure, cost savings relative flexibility, can play the role of financial leverage. However, the higher the financial risk of the bank loans, the more restrictive clauses, to raise a limited amount. Bond financing relative to equity financing, lower its cost of capital, can play the role of financial leverage, at the same time, it can guarantee the control rights of the share capital of the company. However, bond financing and bank loans have a similar disadvantage, that the financial risk is higher, more restrictive clauses, to raise a limited amount. Bond financing and bank loans with similar characteristics for the company into the capital, the two are collectively referred to as debt financing. Equity financing, the Company issued equity financing relative to debt financing, equity financing has the following advantages: the permanent capital of the stock is a company, do not need to be repaid, and also do not have to pay a fixed interest expense, thereby greatly reducing the company's financial risk. However, the cost of capital for equity financing relative to debt financing for high and may dilute existing equity.
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The face of a different way of financing, corporate financing how to choose it? Myers and Majluf (1984) study that: internal financing either to circumvent external financing information asymmetry due to the risk of adverse selection, to avoid responsibility for equity and bond financing costs, it can alleviate the agency conflicts caused by both external financing. Based on this, Myers enterprises should be internal financing and then select the financing pecking order of external financing (pecking order) theory, and that endogenous financing to reduce financing costs and improve investment efficiency. 1984 Miles and Markey Love relaxation of the assumption of the MM theory completely, based on asymmetric information theory, taking into account the existence of transaction costs, that information asymmetry causes the value of the stock of the company wrongly estimated market. In addition, the equity financing will pass negative information business, and external financing to pay a variety of costs, "Pecking Order", corporate finance will generally follow the internal financing, debt financing, equity financing such a sequence of.

Second, equity financing preference of listed companies in China phenomenon and its causes

With the development of China's stock market, equity financing accounted for the proportion of the total number of corporate finance is a clear upward trend. Financing amounted to 15.032 billion yuan, the stock market in 1995 and 2006, the amount of corporate equity financing has reached 559.429 billion yuan. In contrast, China's bond market relative to the stock market relatively isolated, since nine years from 1998 to 2006, China's corporate bonds issued a total of $ 753.069 billion yuan, while the amount of the financing of the stock market in 2006 alone 559.429 billion yuan. In recent years, China's stock and bond market financing situation as follows:
Table (2) can be seen from the above table (1), the number of shares issued by listed companies far more than the number of bonds issued, showed a significant equity financing preference. Obviously this phenomenon with the the Western scholars financing pecking order theory is contrary.
Equity financing preference of listed companies in China phenomenon, many experts and scholars to explore, summarize the following three points of view: a view that China's listed companies there are strong preferences for equity financing is significantly lower than the debt due to the company's cost of equity financing financing costs (Huang, SA, Zhang Gang 2001). The second view is that equity financing preference of listed companies from the corporate managers preferences (oil Hillsborough 2005). The third view is that equity financing preference from managers to maximize the pursuit of personal interests (Li Xiulan, 2008). Of the three perspectives in our country have a certain impact, but I believe that the exploitation of minority shareholders from the major shareholders caused by the phenomenon equity financing preference of listed companies in China.
On the surface, the listed companies choose equity financing mainly because of the special policy of China's listed companies, listed companies perennial do not pay dividends, or just symbolic dividends, so, the actual number of listed companies to pay dividends is low, as equity financing, the major cost of the dividend paid on the listed company does not constitute much cost listed companies feel the pressure is less than the cost of equity capital, it is easy to produce the illusion of "free" capital, equity financing as A no cheap financing debt service. Resulting in the phenomenon of equity financing preference of listed companies in China.
The deeper point of view, I believe that the equity financing preference of listed companies in China are mainly caused this behavior is due to the major shareholders of the company by issuing stock to the exploitation of the interests of minority shareholders.
If Equity Financing Preference of China's listed companies is due to the very low cost of capital for equity financing or even "free" costs for listed companies, for shareholders of listed companies is detrimental both to shareholders withstand listed companies due to poor management may cause a risk of loss of corporate bankruptcy, and can not get higher to compensate for the risk and return. In theory, the benefits and risks do not match, no one willing to buy the shares of the listed companies in China. Especially in state-owned enterprises, state-owned large shareholders accounting for absolute control, there will not be a strong desire for its own sake and can even prevent the market and increase their investment through equity financing through its absolute control of the status. But in fact, the equity financing preference of listed companies in China are manifested should get the approval and support of the major shareholders of listed companies. Why Theory and to achieve conflicting results? Lies the largest shareholder of the company through the issuance of stock to exploitation of the interests of minority shareholders make up for the losses caused due to the asymmetry of risk and return can even get super-normal rate of return on investment gains caused by the behavior. In addition, due to the narrow investment channels in China, the middle and small retail investors can only make up for the losses caused by this kind of exploitation from the speculative stock trading, which on the other hand description of the reasons why China's stock market speculation mood.
The unique dual shareholding structure of listed companies in China, making the largest shareholder holds shares mostly non-tradable shares (Table 3).
As can be seen from Table 3, the non-tradable shares of listed companies in China can not be in circulation in the secondary market in a large proportion of the total number of shares of the Company, more than 60% of the basic, non-tradable shares can not through normal stock market trading profit, generally only with reference to the net assets per share by bulk transfer agreement or auction in the over-the-counter. Secondary market liquidity of our stock price of the stock is generally higher in the case of allotment or issuance of the price of the outstanding shares as the basis for pricing, the largest shareholder of the company holding position by the outstanding shares of minority shareholders "transfer of benefits" ( Johnson 2000), makes equity financing a large increase in net assets per share, to gain a lot of interest in value-added, therefore, the major shareholder of there strong preferences for equity financing. Wu warfare basket, Jiang Wei empirical analysis shows that China's listed companies that there is equity financing preference, and the higher the proportion of the major shareholding, and the higher the proportion of non-tradable shares held by the largest shareholder, the largest shareholder of the more preferred equity financing. Lee Kang et al (2003) study also shows that the non-tradable shareholders whether or not to participate in the allotment or issuance, can enjoy the benefits brought about by the large increase of the net assets per share. These findings support the argument that exploitation of minority shareholders equity financing preference of China's listed companies motivation stems from the major shareholders.
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