This paper investigates the relationship between the quality of governance and the cost of equity in financial companies. It finds that financial companies with the . and mobility, and imposes additional costs on public budgets to deal with the The evidence shows that equity can go hand-in-hand with quality; and that reducing . Teaching resources in relation to school's average socio-economic. We find a significant negative association between each accounting-based earnings quality proxy considered separately and the cost of equity. Our results also.
Moreover, the optimal level of ownership concentration for value maximization may significantly differ from what is optimal for the low cost of equity. This study tests a proposed nonlinear relationship between ownership concentration and the cost of equity. Moreover, it investigates the potential role of disclosure quality in mitigating the adverse consequences of concentrated ownership in the said relationship.
Such a role for disclosure quality may exist because if the controlling owner intends to expropriate he would opt for opaque information environment and investors would perceive the potential risk of expropriation, thus demanding higher required returns.
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This study registers a nonlinear relationship between ownership concentration and cost of equity for Chinese listed private firms. The empirical evidence suggests that the greater ownership concentration beyond an optimal threshold results in higher cost of equity. Incidentally, it is found that the optimal ownership concentration for the low cost of equity is much lower than that for value maximization.
Further analysis, using three alternative measures of disclosure quality, provides empirical support for a role of better disclosure quality in mitigating the strength of the positive relationship between ownership concentration and the cost of equity. Literature Review and Hypothesis Development Ownership structures of firms vary significantly across countries and a concentrated ownership structure is more common in countries with weaker legal rights and poor investor protection [ 45 ].
These studies though differ on the functional form ownership-performance relationship but they provide following two major arguments for a link between ownership concentration and firm value [ 3 ].
The outside minority investors free riders would value this firm more as they get better management supervision and improved performance without sharing in costs of supervision. Second, the concentration of ownership beyond an optimal level introduces the potential for principal-principal agency conflict, where a large controlling shareholder can pursue selfish interests at the expense of minority shareholders.
Controlling shareholders can expropriate firm resources in forms such as tunneling, inter-corporate loans, or outright expropriation [ 9 - 11 ].Cost of Equity
However, an increase decrease in firm value does not imply lower higher cost of equity if the change in firm value is only proportional to the change in firm performance induced by increased ownership concentration. And an ownership concentration level optimal for firm value may not be optimal for the cost of equity. An increase in ownership concentration mitigates managerial entrenchment.
Ownership Concentration, Disclosure Quality and the Cost of Equity in Chinese Listed Private Firms
The interests of owners and that of management become more aligned, which reduces the cash flow risk of the firm. However, when the ownership concentration surpasses the threshold where principal-principal conflict gets introduced an increase in ownership concentration increases expropriation risk for minority investors who would require higher returns to compensate for it.
Hence, it is only logical that we expect a nonlinear relationship between ownership concentration and cost of equity. Where an initial increase in ownership concentration reduces the cost of equity till an optimal level is achieved, after which further increase in ownership concentration would result in higher cost of equity.
So we develop following hypotheses.
Concentrating ownership initially reduces the cost of equity but the relationship reverses once ownership concentration surpasses the optimal level.
If controlling shareholders are perusing selfish interests by expropriating minority shareholders they would want to keep an opaque information environment to avoid divulging their expropriating activities and resultant reputational damages and legal penalties. Hence, disclosure quality potentially moderates the relationship between ownership concentration and cost of equity, where better disclosure quality mitigates the adverse consequences of higher ownership concentration.
So we develop the following hypothesis. Better disclosure quality mitigates the strength of the positive relationship between ownership concentration and cost of equity. Methodology Sample and data Our initial sample comprises of all the private firms listed on Shanghai Stock Exchange or Shenzhen Stock exchange during the period The period before is not considered due to following two reasons. First, China is a market in transition where a number of significant reforms such as IFRS adoption in and nontradable shares reforms in have transformed the capital market.
To increase the generalizability of this study, our focus is on the period after these fundamental reforms were fully realized. Second, the unprecedented rise in market trading and capitalization in aftermaths of non-tradable shares reforms in the year was followed by an equally unprecedented fall in Chinese stock market in the year in wake of Global Financial Crisis. We expect disclosure quality to be more relevant in China in aftermaths of global financial crisis. A significant portion of Chinese capital market consists of stateowned enterprises.
International Journal of Economics and Financial Issues
These firms have peculiar governance structure and management philosophy which set them apart from private firms. More importantly, the theoretic reasoning for a relationship between ownership concentration and cost of equity in private enterprises is less plausible for that in state-owned enterprises.
Thus, to avoid unnecessary dilution and to increase the generalizability of this study to other economies we exclude state-owned enterprises from our analysis. Model and estimation technique We model cost of equity as a dynamic function where its current period value is an adjustment from that in the previous period. The level and direction of adjustment depend upon a variety of firm and period specific variables.
To test hypotheses H1a and H1b we estimate the following equation 1. OwnConcentration represents the degree of ownership concentration for firm i in period t.
It is measured as the proportion of outstanding stocks held by the largest owner. To establish the nonlinearity of relationship, we expect a significantly positive coefficient on squared ownership concentration, i. Botosan used the information disclosure index to empirically study the relationship between information disclosure level and cost of equity capital and obtained negative correlation between information disclosure level and cost of equity capital by the number of analysts tracking.
Bhattacharya proved that the lower of the cost of equity capital, the lower of the cost of equity capital on the basis of the other factors are the same by constructing the income opacity indicators. Juanjuan Huang used issuance of shares of listed companies panel data from to as the basis, take the earnings opacity measure information disclosure quality, it is concluded that the information disclosure quality improved reduce the cost of equity capital significantly.
Ownership Concentration, Disclosure Quality and the Cost of Equity in Chinese Listed Private Firms
Also that contrary to the conclusions of the study, Wenfeng Wu concludes that the improvement of information disclosure quality does not reduce the cost of equity financing theory on the basis of the whole China investment consciousness, without the information disclosure quality as an investment decision-making the important influence factor.
Object of Study In the process of continuous in-depth study the object is also constantly changing. Social Responsibility Report The report of social responsibility is becoming more and more factors that affect the quality of information disclosure, and the quality of environmental accounting information disclosure has become a hot research topic in the past two years. Richardson and Welker concluded that the equity financing costs and social responsibility information disclosure is positively related using regression analysis of the method of research in Canada listed companies, and the better performance of the results obtained the lower significance.
Yuejun Ren, Wenhong Qiao also reached a similar conclusion. The mainstream viewpoint for the research of identity information disclosure quality improvement can effectively reduce the cost of equity financing, in addition to transform methods of research the subject has not been improved in the process of research, index selection and measure standard in different studies in literature are close, lack of study on the path choice.
A New Perspective 3. The Selection and Induction of Measurement The Shenzhen Stock Exchange is on the high degree of understanding in the securities market, Based on capital market in China started late, development is not mature enough, our research in the information disclosure quality variables are selected on the base of Shenzhen stock exchange information disclosure evaluation rating, earnings information disclosure index to replace the information disclosure quality has become a trend, and the choice and application conditions are different on the cost of equity financing variables.
Table 1 shows the common variable selection in the research of the impact of information disclosure quality on the cost of equity financing. In general, the quality of information disclosure as the independent variable, the cost of equity financing as a result of regression analysis methods are recognized and exist in a large number of research based on the control of other variables.
The variable selection of quality of information disclosure and cost of equity financing. View of Time Series Accounting information disclosure is based on the hypothesis of the enterprise continuous operation, and information asymmetry theory includes not only the contents of information asymmetry but also contains time information asymmetry.
Information disclosure quality should not be only a simple linear relationship between the costs of equity financing, we should research the long-term interconnection and interaction analysis on the basis of time series. Their research ensures the consistency of samples, at the same time reduce the number of samples.
The Theoretical Basis of Time Series Analysis The time series analysis is based on the observation of the variables of a process at different times, using the corresponding model to analyze and predict the observation data.