Effect of Disclosure Level on Cost of Equity Capital for China Real Estate Enterprises

BY

Yu Fei
0930600146
Accounting

Guo Ziqi
0930600035
Accounting

A Business Project Submitted to the Division of
Business and Management in Partial Fulfilment of the Graduation Requirement for the Degree of
Bachelor of Business Administration (Honours)

Beijing Normal University – Hong Kong Baptist University
United International College

April 2013

Acknowledgment

At the conclusion of our Final Year Project, we would like to sincerely thank to all the individuals who have assisted us while we were working on this project. First of all, we would like to show our sincere gratitude to our supervisor, Dr. Donna Chan. She gave us so much guidance and support in refining our paper. We could have completed our paper so smoothly without her encouragement. Secondly, we would like to express our thanks to each other for the teamwork, the collaborative sprite and the mutual learning, which were essential for such an involved term project. Last but not least, we would like to thank all UIC-Division of Business & Management’s faculty and our classmates who have offered us the needed assistance throughout the project.

Table of Contents

List of Tables

Table 1 Summary of Sample Selection Procedure--------------------------------------------------13
Table 2 Descriptive Statistics for Sample Firms-----------------------------------------------------19
Table 3 Pearson Correlation Coefficients (two-tailed) for Disclosure level (DPNTS) and Enterprises Characteristics------------------------------------------------------------------------------20
Table 4 Pearson Correlation Coefficients (two-tailed) for Cost of Equity Capital (ROE) and Enterprises Characteristics------------------------------------------------------------------------------22
Table 5 Regression of Ex-ante Cost of Capital on Financial Leverage, Market Value and Disclosure Level------------------------------------------------------------------------------------------26
Table 6 Regression of Ex-ante Cost of Capital on Financial Leverage, Market Value and Disclosure Level for the firm with small market value---------------------------------------------27
Table 7 Regression of Ex-ante Cost of Capital on Financial Leverage, Market Value and Disclosure Level for the firm with large market value----------------------------------------------28

Abstract Many researchers before found a negative correlation between information disclosure and the cost of equity capital. The purposes of this study were to test whether the negative relationship between disclosure and the cost of equity capital also reflected in the Chinese stock exchange market as well as research the elements that affect the negative relationship. Sixty-six enterprises in the real estate industry were chosen as the sample and the data were analysis by using two modified financial models. The writers measured cost of equity capital by using the modified Jones model of Espinosa & Trombetta (2007) and the determined disclosure level by using the modified model of Petrova et al. (2012). The results confirmed the existence of the negative relationship between disclosure and the cost of equity capital for the real estate enterprises in China. It was further discovered that the negative relation was more significant in the enterprises with lower market value. The writers suggest that the noteworthy discovery was stemmed from the irrational behavior of investors coupled with China actual emerging stock market.
1. Introduction
Thirty years ago, President Deng Xiaoping established the reform and opening-up policy, which encouraged China to boost its economy rapidly in the coming years (Belton, Li, & Zhao, 2010). Since both Shenzhen and Shanghai stock exchange markets opened in 1990, China’s stock market has