The Puzzle of Equity Financing Preference in China's Listed Companies
Lu Zhengfei & Ye Kangtao (Guanghua School of Management, Peking University)
China's listed companies strongly preferred to equity financing. Traditionally, the academe ascribed such a phenomenon to the lower cost of equity financing. However, our analysis shows that capital cost cannot well explain such a phenomenon. Therefore, we use a Logit model, examining the determinants of China's listed companies' financing behavior from the aspects of financing cost, bankruptcy risk, debt capacity, agency cost and corporate control. Our analysis shows that the lower the company's capital size and free cash, the higher the ROE and the share of the controlling shareholders, the more likely the company would choose equity financing. But our analysis does not find that bankruptcy risk and growth have an impact on company's financing decision. Besides, our analysis shows that equity cost is positively related to the probability of equity financing. Finally, we propose some policy implications.