Business groups and the cost of equity capital: An empirical study of Chinese listed firms

• Main Authors: Chun-Hsien Wang, 王駿憲
• Other Authors: Jung-Hua Hung
• Format: Others
• Language: zh-TW
• Published: 2015
• Online Access: http://ndltd.ncl.edu.tw/handle/dubb5g

碩士 === 國立中央大學 === 企業管理學系 === 103 === Considering China is the second-largest economy in the world, business groups contribute tremendous value of production to China in particular. This study investigates if there is a significant difference in the cost of equity between group-affiliated firms and stand-alone firms. Furthermore, we examine if the difference is related to state ownership. We examine how the existence of related party transactions in state-owned affiliated firms affects the cost of equity of firms. Our sample includes listed companies from the Shanghai and Shenzhen Stock Exchanges for the year 2006 to 2013. We use Panel Least Squares regression analysis and Wald Test analysis to examine hypotheses. Our results are as follows: (1) Group-affiliated firms have a significant higher cost of equity than stand-alone firms. It suggests that business groups in China are not consistent with the finding in developed economies, probably because the way and motivation of forming groups are different from developed economies. (2) State ownership makes the cost of equity of group-affiliated firms significant higher than stand-alone firms. It suggests that investors give state-owned affiliated firms a negative evaluation. (3) Related party transactions are significantly positively related to the cost of equity for state-owned affiliated firms. It suggests that the controlling shareholder in state-owned affiliated firms will use related party transactions to tunnel and therefore investors will assume high risk of expropriation. The implications of this study are to provide policy makers with references to conduct the privatization of business groups, and to give advices to managers for estimating firms’ cost of equity capital.