Cost Of Equity Financing Research Articles

Assessing the Impact of Environmental Accounting Message Disclosure Quality on Financing Costs in High-Pollution Industries

This article explores the relationship between environmental accounting message disclosure quality and financing costs in environmentally impactful industries. Utilizing a mixed-methods approach, it combines quantitative analysis of financial indicators with qualitative insights from industry experts. The findings indicate a significant correlation between high-quality environmental message disclosure and lower equity financing costs, suggesting that investors prioritize sustainability in their decisions. Companies that demonstrate greater environmental accountability enjoy improved access to capital. The article concludes that integrating robust environmental accounting practices and effective message disclosure is essential for fostering sustainable business practices, enhancing long-term financial viability, and promoting a culture of sustainability and resilience in the face of environmental challenges

North Korea's threats and the cost of equity capital: The effect of information environments

We examine how the information environment affects the association between North Korea's threats and the cost of equity financing. Using a sample of Korean publicly-listed firms from 2012 to 2019, we find evidence that the adverse effect of North Korea's threats on the cost of equity capital is more significant for companies in less transparent information environments after controlling for other factors. Our findings contribute to the literature by identifying that the information environment affects geopolitical risk.

The Impact of Selected Financial Ratios on Economic Value Added: Evidence from Croatia

Traditional financial performance measures should be extended to provide additional information to stakeholders. One such extension is the economic value added (EVA). It shows residual profit above the cost of financing, both creditors and equity financing. This paper elaborates on the impact of selected financial ratios on EVA to total assets and EVA to capital employed using the 20-year aggregated data of non-financial business entities operating in Croatia. It answers the research question of which of the selected financial ratios impacts the above-mentioned EVA-based ratios. Applying dynamic panel data modeling using the generalized method of moments technique resulted in the derivation of two models. The human capital efficiency ratio was statistically significant in both models, positively affecting EVA/total assets and EVA/capital employed. In contrast, the debt ratio and net profit margin were significant only in the second model, where EVA/capital employed was a dependent variable. The research results indicate that the debt ratio affects EVA/capital employed negatively while the net profit margin has a positive effect, confirming the existing research. Total liabilities/earnings before interest, taxes, depreciation and amortization, and total asset turnover were not found to be significant in either of the two models.

The impact of China's carbon emissions trading policy on corporate investment expenditures: Evidence from carbon-intensive industries

The carbon emissions trading (CET) policy internalises the cost of carbon emission reductions borne by companies, which will affect the companies' investment and management decisions. From a micro perspective, this paper analyzes the impact on company investment expenditure and its transmission mechanism by implementing the CET policy. Based on panel data of China's A-share listed companies from eight carbon-intensive industries spanning 2010 to 2020, the time-varying difference-in-difference model and its extended model are used to evaluate the impact of the policy in the pilot areas. The results show that: first, based on the cost effect and legality theories, CET policy can reduce the investment expenditure of the companies by 71.95%. Second, CET policy reduces corporate investment expenditures by increasing corporate debt financing costs. When debt financing costs increase by 120.25%, the investment expenditures will reduce by 2.56% indirectly while the intermediary effect of equity financing costs is not significant. Finally, with the implementation of CET policy, the inhibitory effect on corporate investment expenditures has gradually increased. CET policy has a more significant inhibitory effect on investment expenditures of nonstate-owned companies and small-scale companies. The results have passed the robustness test and provide evidence for the policy-maker to balance microeconomic entity development and carbon reduction, and for companies to make optimization investment and financing decisions in response to policy shocks effectively.

ESG Performance and Enterprise Value in China: A Novel Approach via a Regulated Intermediary Model

ESG (environmental, social, and governance) performance increasingly influences enterprise valuation. While researchers debate about the precise nature of this influence, most assume a positive linear relationship. This study introduces a novel ESG responsibility performance metric utilizing a regulated intermediary model using representative data synthesized from leading ESG rating agencies in China. It investigates the pathways of this influence and examines the mediating effects of corporate reputation, stakeholder engagement, and regulatory compliance. The findings reveal an inverted U-shaped relationship between ESG performance and enterprise value, moderated significantly by financing constraints. These findings remain robust after accounting for potential endogeneity using instrumental variables. Heterogeneity analysis highlights that this inverted U-shaped relationship depends on the industry characteristics and ownership structures, particularly noticeable in non-polluting and non-state-owned enterprises. Moreover, enhanced ESG performance correlates with a reduced cost of equity financing, thereby augmenting enterprise value. Financial institutions might consider employing innovative financial instruments to diversify their enterprise financing channels and effectively bolster ESG-focused enterprises.

Environment Social Governance Performance and Capital Structure: Evidence in Indonesia and Malaysia

Purpose: This research aims to investigate the relationship between Environmental, Social, and Governance (ESG) performance and capital structure, using Debt-to-Equity Ratio (DER) and Debt-to-Asset Ratio (DAR) proxies, in Indonesia and Malaysia. The study seeks to address the gap in the literature by exploring how ESG factors influence the capital structure decisions of both financial and non-financial companies in these countries. Additionally, the research analyzes the impact of ESG performance on the cost of equity and cost of debt. Methods: The research utilizes secondary data extracted from annual reports and sustainability reports spanning from 2015 to 2020. A total of 102 companies, comprising 59 Indonesian companies and 52 Malaysian companies registered on CSRHub, are included in the analysis. ESG performance is assessed based on community, environmental, social, and governance indicators. Capital structure is measured using DER and DAR proxies. Statistical analysis techniques are employed to examine the relationship between ESG performance and capital structure, as well as its impact on the cost of equity and cost of debt. Results and Discussion: The research findings indicate that community, environmental, social, and governance performance exhibit a negative effect on the cost of equity, suggesting that companies with stronger ESG performance experience lower costs of equity financing. However, these ESG factors do not significantly affect the cost of debt. This implies that while ESG performance may influence equity holders' perceptions of risk and return, it may not have a direct impact on the cost of debt financing for companies in Indonesia and Malaysia. Implications of the Research: The results of this research have important implications for companies, investors, and policymakers interested in understanding the relationship between ESG performance, capital structure decisions, and financing costs. By demonstrating the impact of ESG factors on the cost of equity, the findings underscore the importance of integrating sustainability considerations into financial decision-making processes. Moreover, the research highlights the need for further investigation into the mechanisms through which ESG performance influences capital structure and financing costs. Originality/Value: This study contributes to the literature by offering novel insights into the relationship between ESG performance and capital structure in Indonesia and Malaysia. By examining the impact of ESG factors on both equity and debt financing costs, the research expands our understanding of how sustainability considerations influence corporate financial decisions. The findings provide valuable guidance for companies seeking to enhance their ESG performance and optimize their capital structure, ultimately contributing to more sustainable and responsible business practices in emerging markets.

Corporate philanthropy, political connections, and costs of equity capital

AbstractWe examine how investors' perceptions of firms' philanthropic behaviors alter the effect of corporate philanthropy on costs of equity capital. Using a sample of Chinese A‐share listed firms from 2007 to 2018, we find that firms making philanthropic donations have higher equity financing costs. In contrast, firms without politically connected executives, experiencing provincial official turnovers, and located in provinces with fiscal pressure do not see an increase in costs of equity capital. In addition, Chinese investors consider strategic corporate philanthropy to establish political connections less valuable after anticorruption campaigns are launched, hence requiring higher rates of return from firms making monetary donations. Overall, this paper provides evidence that investors' perceptions of firm behavior are shaped by unique institutional factors in emerging markets, resulting in unintended economic consequences for firms.

The effect of environmental, social, and governance disclosure and real earning management on the cost of financing

AbstractThis study identifies if sustainable development practices measured through ESG information disclosure are related to stakeholder confidence, leading to a lower cost of debt and equity financing. We also investigate the possible moderating role of real earnings management. We apply a fixed effects panel data analysis to 1659 firm‐year observations of 177 European companies from 2010 to 2019. The results show that investors value ESG disclosure negatively and increase the cost of equity, whereas lenders value it positively and reduce the cost of debt. In addition, when the moderating effect of real earnings management is introduced, the effect of ESG disclosure on the cost of debt decreases, and the effect of ESG disclosure on the cost of equity is reinforced by increasing it. In the presence of real earnings management, investors and lenders seem to think companies use ESG disclosure to legitimise their practices or mislead financing providers.

Navigating the trade‐off between corporate social responsibility disclosure and the cost of financing: Evidence from BRICS economies

AbstractThis study investigates the relationship between corporate social responsibility disclosure (CSRD) and the cost of financing for firms in emerging economies. Results show that CSRD initially reduces the cost of equity financing but increases equity costs beyond a certain threshold. Firms should weigh the trade‐offs of signal cost and benefits when choosing financing strategies. Moreover, investors in the debt market perceive a higher level of board independence as less risky, which consequently has a negative impact on the relationship between CSRD and the cost of debt. Thus, companies should streamline their CSR disclosures to reduce their cost of capital.

Climate change exposure and cost of equity

In this study, we investigate the association between climate change exposure and the cost of equity financing. Using a novel dataset of US firm-level exposure to climate change risks, we find that higher exposure to climate risks co-exists with higher financing costs for the period 2010 through 2021. While the effect of physical and regulatory risks is rather muted, the main mechanism shaping financing costs stems from climate transition risk driven by uncertainty about new business opportunities. Our results are not compromised by endogeneity concerns as shown by alternative methods such as entropy balancing, instrumental variable regression, dynamic panel estimation and a difference-in-differences setting. We also document that the link between climate change exposure and the cost of equity financing is more prominent for firms facing higher attention to climate topics, a stronger realization of climate change and more problematic financing constraints.

An empirical study on the impact of blockchain on the cost of company equity financing

An empirical study on the impact of blockchain on the cost of company equity financing

ESG Transformation in the Largest Emerging Capital Market of China. A Literature Review

The paper provides a scholarly examination of academic studies of the ESG landscape in China through a systematic literature review with a major focus on the nature and intensity of regulatory guidelines and policies. While many studies indicate positive effects of Chinese ESG policies on corporate ESG performance and investment, they primarily focus on environmental aspects. This analysis of China’s ESG rating system exposes relationships between ESG ratings, corporate performance, financing costs, including both debt and equity financing. The research on equity financing costs is inconsistent and limited in scope, indicating the need for additional investigation. Of the factors influencing ESG, the past year has seen a surge in research on the topic of digital transformation and ESG performance. Most studies demonstrate thatdigital transformation contributes to ESG performance, and a few suggest that digital transformation positively moderates the effect of ESG performance on firm value enhancement. This review discusses the growth of ESG investment in China, focusing on pension funds, commercial banks, and ESG funds, as well as investor preferences. Despite the growing role of ESG in investment decisions, extant research is largely theoretical, underscoring the need for more empirical and quantitative studies. The research identifies gaps in studies devoted to ESG investment, including the need for comprehensive studies on the impact of ESG across various insurance types and industries, and the development of effective ESG quality assessment methods. This review is among the first academic resources summarizing and integrating various studies, and highlighting areas for future ESG research in China.

Can Reverse Mixed-Ownership Reform Reduce the Cost of Equity Financing of Private Enterprises?

ABSTRACT How to leverage the advantages of state-owned capital to promote the high-quality development of private enterprises is a central issue of mixed-ownership reform. We empirically explore the effect of reverse mixed-ownership reform on the cost of equity financing for private enterprises and the underlying mechanism from two perspectives: equity structure and high-level governance using fixed-effect and IV regressions. We find that reverse mixed-ownership reform significantly reduces the cost of equity financing for private enterprises. The mediation effect tests suggest that the improvement of information disclosure quality and equity liquidity partially play intermediary roles in the relation between the reform and the equity financing cost. Heterogeneity tests suggest that cost of equity financing for private enterprises are significantly reduced for firms operating in highly competitive industry environment and firms located in regions with lower level of marketization. We contribute to the understanding of the economic consequences of reverse mixed-ownership reform and provide policy insights for further advancing the reform in private enterprises while effectively harnessing the advantages of state-owned capital.

Economic policy uncertainty and enterprise innovation in China: From the perspective of equity financing and financing structure

Based on the perspective of equity financing and financing structure, this paper discusses the impact of economic policy uncertainty on enterprise innovation and analyzes the transmission mechanism of equity financing between them and the role of financing structure optimization under uncertainty. The findings reveal that economic policy uncertainty promotes enterprise innovation, and the positive effect is even more pronounced in non-state-owned and eastern enterprises, as well as high-tech enterprises. For the transmission mechanism of equity financing, it finds that the scale of equity financing and the cost of equity financing play positive and negative intermediary roles respectively. That is economic policy uncertainty promotes enterprise innovation by increasing the scale of equity financing and affects enterprise innovation negatively by increasing the cost of equity financing. For the overall financing structure of enterprises, the proportion of equity capital exerts positive mediating and moderating effects on the relationship of economic policy uncertainty and enterprise innovation. That is economic policy uncertainty promotes enterprise innovation by adjusting the financing structure, and the proportion of equity capital will also strengthen the incentive effect of policy uncertainty on innovation. Further, economic policy uncertainty will increase the equity financing scale, equity financing cost and equity capital proportion more obviously in non-state-owned enterprises, and the proportion of equity capital will strengthen the incentive effect of economic policy uncertainty on innovation more in non-state-owned enterprises. The conclusions of this paper not only provide decision-making reference on how to optimize the financing structure to better cope with economic policy uncertainty and then promote enterprise innovation for enterprises, but also provide theoretical support for optimizing macro-control, deepening financial system reform and enhancing enterprise competitiveness.

The use of asset growth in empirical asset pricing models

We show that the performance of the new factor models of Hou et al. (2015) and Fama and French (2015) depends crucially on how their investment factor is constructed. Both models use growth in total assets to measure investment. Their ability to price the cross-section of returns decreases significantly when the investment factor is constructed using traditional investment measures, or measures that also account for investment in intangibles. In contrast, we find that factors based on growth in inventory and accounts receivable contain the bulk of the pricing information in the asset growth factor. We show evidence that the superior performance of the asset growth factor seems to be attributable to its ability to capture aggregate shocks to equity financing costs.

Research on Capital Structure and Investment Value of Supermarket Industry

This paper focuses on researching the capital structure and investment value of the supermarket industry, specifically examining the impact of epidemiological events on value investment within this sector. The objective is to explore the factors that influence capital structure decisions and their implications for investment value. The analysis employs the Weighted Average Cost of Capital (WACC) method to evaluate the relationship between capital structure and investment performance in the context of the supermarket industry. The study aims to investigate the influence of epidemiological events, such as COVID-19, on the capital structure decisions of supermarket companies and their subsequent effects on investment value. The research considers factors such as the size and maturity of the companies, risk profiles, regulatory environments, and cost of capital considerations to assess their impact on capital structure choices. By utilizing the WACC method, A study of supermarket investment value and capital structure decisions is presented in this paper. The WACC approach allows for a comprehensive evaluation of the cost of debt and equity financing, incorporating factors such as interest rates, tax implications, and market conditions.

Research on the Influence of Listed Companies' Strategy on Financing Cost

The strategy of companies is related to the survival and development of enterprises. Listed companies with different strategies have different business characteristics, and the difference will affect the comprehensive judgment of investors on the company, thus affecting the efficiency and cost of absorbing external funds. The development strategy disclosed in the annual report of listed companies is an important channel for external investors to understand strategy and analyze value of the company. This paper makes a textual analysis of the development strategy of listed companies, and explore the influence of it on the cost of equity financing. This paper studies the influence of text readability, text intonation and strategic differences of listed companies on the cost of equity financing, taking the Shanghai and Shenzhen A-share listed companies from 2015 to 2020 as samples. This paper studies the influence of listed companies' strategies on the cost of equity financing from the perspective of text analysis, which expands the channels for studying the strategic characteristics of companies, and provides some reference for listed companies to disclose their development strategies in the future.

Blockchain Technology and Small and Medium Enterprises Access to Finance

Small and medium enterprises (SMEs) are essential in developing the world economy. However, they face financing distress due to high information asymmetry and lack of collateral and credit. From the enterprises sustainable development perspective in the big data era, this study explores whether and how blockchain technology can alleviate the information asymmetry problems of SMEs and further improve the convenience of accessing finance. Blockchain technologys decentralized, unchangeable, and transparent natures can reduce information asymmetry between SMEs and the financing parties. SMEs become more creditable to the bank with a more transparent share of businesses operation information and financial conditions based on blockchain. At the same time, market investors can also learn more about the operation of corporate funds. Overall, this study provides new insights on how to use blockchain technology to increase SMEs development efficiency by lessening information asymmetry, reducing the cost of equity and bond financing for SMEs, and effectively reducing SMEs financing difficulties in this age of big data.

Is institutional common ownership commonly priced? Insights from the cost of equity capital

This study examines the effect of institutional common ownership on a firm's cost of equity capital. Recent literature on common ownership yields opposing predictions: increased strategic alliance in the product market could increase the non-diversifiable covariance risk of a firm's cash flows with other firms, leading to a higher cost of equity capital. However, reduced product market risk that is in part non-diversifiable could lead to a lower cost of equity capital. In both baseline and difference-in-differences settings, we document a negative and significant relation between common ownership and the cost of equity capital. We also provide direct evidence that common ownership reduces product market predation risk, distress risk, and overall risk while increasing stock liquidity. We do not find sufficient evidence that improved corporate governance drives the main findings. Overall, our findings indicate that institutional common ownership offers benefits to individual firms by reducing the cost of equity financing.

The Implications of Pillar Two for Corporate Tax Reform

Recent proposals for corporate tax reform in Canada call for changing the existing tax on shareholder income to a tax on rents or above-normal profits. A feasible option would be an allowance for corporate equity (ACE) system based on the territorial principle. Canada has agreed to the approach to international corporate tax reform developed by the Organisation for Economic Co-operation and Development, including the pillar two minimum tax proposal. We explore the compatibility of adopting pillar two with the ACE system. Several elements of pillar two would complement moving to an ACE system. Large multinational corporations would be liable for a top-up tax if their effective tax rates in any given jurisdiction fell below 15 percent. The effective tax rates and the top-up tax would both use the territorial approach and consolidated accounting. The top-up tax would be similar to a tax on excess profits. Pillar two might also mitigate tax competition and reduce the constraints that countries face in increasing their tax rates on excess profits. For these reasons, pillar two would facilitate moving to an ACE system. At the same time, the minimum tax would deter adoption of an ACE if the deduction for the cost of equity finance reduced the pillar two effective tax rate. On balance, pillar two would be compatible with proposed corporate tax reforms.