The influence of Stock Price Crash Risk on the cost of capital

Abstract

This study examines the effect of Sock Price Crash Risk (SPCR) on the cost of capital in Chinese listed firms in the Shenzhen stock exchange and the shanghai Stock Exchange. We take sample as 290 firms one the base of the highest value of assets of each firm. The cost of capital consists of two factors; the cost of equity (COE) and the cost of debt (COD). The SPCR is measured by using two statistics, one is NCSKEW means the negative coefficient of skewness of the firm-specific weekly returns and the second is DUVOL that means Down to-Up Volatility used to measure the crash likelihood weekly return of firm-specific and use the Modified PEG ratio model of Eston approach to measuring the cost of equity. We use the regression model with analyses of panel data. in the practice, we find SPCR is a significantly positive relationship with the cost of equity and cost of debt. Also, the sample was divided into the State-Owned enterprise (SOEs) and Non-State-Owned enterprise (NSOEs) for comparison. The results effect of SPCR on the cost of equity stronger in SOEs than NSOEs and the results effect of SPCR on the cost of debt stronger in NSOEs than the SOEs. In order to reduce the cost of equity capital of listed companies and improve the financing efficiency of China's capital market, regulatory authorities should perfect and strengthen the formulation of relevant laws and regulations on enterprise information disclosure. Enterprises should strengthen the construction of internal control, and make joint efforts to create a good information disclosure environment and prevent the risk of a stock price crash.