Abstract
Due to the immaturity of bond market and the defects of internal governance structure, Chinese-listed companies have a strong preference for equity financing. How to reduce the cost of equity capital is particularly important for Chinese-listed companies. As an equity incentive system, employee stock ownership plan (ESOP) can reduce the agency conflicts among shareholders, executives, and employees to some extent. These reduced conflicts will, in an efficient capital market, be reflected in a lower cost of equity capital. This paper investigates whether the implementation of ESOP in a new era in China affects the cost of equity capital and further explores whether the impact of ESOP on the cost of equity capital is affected by the ownership nature, the firm size, and the contract design of ESOP. The results show that the implementation of ESOP reduces the cost of equity capital of enterprises. Compared with state-owned enterprises and large enterprises, the implementation of ESOP is more likely to reduce the cost of equity capital in non-state-owned enterprises and small enterprises. Furthermore, the reduction effect of ESOP on the cost of equity capital is influenced by the contract design of ESOP. This study not only enriches the literature on the relationship between employee stock ownership and the cost of equity capital but also provides a new idea for listed companies to reduce the cost of equity financing.
Highlights
Cost of equity capital is an ability of enterprises to obtain funds from the capital market, and it is a key factor affecting the efficiency of resource allocation in the capital market [1]
The PEG model is used to estimate the cost of equity capital of listed companies. e analyst forecasts of earnings per share data and the actual closing price data at the end of the year are used, among which the analyst forecast data comes from CSMAR database and the stock closing price data comes from RESSET database. e data of implementation and contract elements of employee stock ownership plan (ESOP) are from Wind database, and other financial data are from CSMAR database
In terms of dependent variable, the mean, minimum, and maximum values of cost of equity capital (COE) estimated by the PEG model are 0.113, 0, and 0.536, respectively, indicating that, in China capital market, listed companies need to pay an average of 11.3% return to investors in order to obtain funds by equity financing, and there is a great gap of equity capital cost among companies
Summary
Cost of equity capital is an ability of enterprises to obtain funds from the capital market, and it is a key factor affecting the efficiency of resource allocation in the capital market [1]. Cost of equity capital is an important basis for enterprises to choose capital sources, design financing schemes, and determine financing methods and a main reference index for enterprises to judge the feasibility of investment and decide whether to invest. It plays an important role in enterprises’ financial decision-making and value evaluation [2]. Due to the imperfect bond market and the defects of corporate governance structure, Chinese-listed companies have a strong preference for equity financing, and there is a typical abnormal order financing phenomenon [3,4,5]. erefore, under the unique institutional background of China, it is of great theoretical significance and practical value to study the influencing factors of the cost of equity capital and how to effectively reduce the cost of equity capital of enterprises
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