Capital cost refers to all kinds of fund-raising expenses and various forms of occupation expenses paid by fund users for raising and occupying funds. It is the payment of part of profits and capital rewards to fund owners, which reflects the profit distribution relationship between fund users and owners. From the definition of capital cost, financing cost is simply considered from the perspective of capital users.
1 has different concepts.
On the surface, when enterprises actually use capital, they always convert it into money before investing or buying physical assets. In this sense, both capital and capital can be expressed in money, so the cost of capital and capital seems to be mutually replaceable. But from a deeper perspective, capital cost and capital cost are two completely different concepts.
With regard to the cost of capital (COC), the most authoritative definition at present is given in the New palgrave Monetary and Financial Dictionary: "The cost of capital is the expected rate of return required by investors in commercial assets. Company managers who aim at maximizing value regard the cost of capital as the discount rate or the lowest rate of return for evaluating investment projects "[1]. It can be seen that according to the explanation of modern corporate finance theory, the cost of capital is not only the expected rate of return required by investors, but also the financing cost of qualified capital users.
The cost of capital belongs to the unique category of China's financial theory research. "The so-called capital cost refers to all kinds of financing expenses and various forms of occupation expenses paid by capital users for raising and occupying funds, which is the reward paid by part of profits and funds to the owners of funds, reflecting the profit distribution relationship between capital users and owners" [2]. From the definition of capital cost, financing cost is simply considered from the perspective of capital users.
With the introduction of capital market and modern corporate finance theory into China, the cost of capital is an "exotic product". Capital cost is the product of China's enterprise reform and the financing cost unilaterally decided by enterprise managers. However, until today, China's financial theorists still confuse the two: either the name and definition of capital cost are still used, and the capital cost is not mentioned at all; On the one hand, we use the name of capital cost, on the other hand, we still use the definition of capital cost.
2 The background of pricing theory and real economy is different.
As the name implies, capital cost and capital cost are the prices of financing instruments issued by enterprises, that is, the price index that determines the financing decisions of enterprises. Inspired by this similarity, we discuss their fundamental differences from the background of pricing theory and real economy.
2. 1 From the point of view of whether risk factors should be considered,
Compared with ordinary commodities, the biggest feature of financial assets is the uncertainty of income, that is, risk, and the risk of capital assets is much greater than that of monetary assets. Therefore, when pricing financial assets, its risk has become a factor that people have to consider. Among them, because of its short term, monetary assets can be priced directly by raising fees and occupation fees, but the pricing of capital assets must consider its risks. In 1964 and 1965, WilliamF. Sharpe and J.Lintner, the famous American financial management experts, made in-depth research on the basis of H.Markowitz and put forward the CAPM to determine the risk price of capital assets, that is, the cost of capital. Since then, western companies have mainly used the concept of capital cost of risk pricing in financing decisions.
On the contrary, China theorists have always ignored the risk factors in capital pricing in the past, and mistakenly thought that "the price of capital itself is equal to the price of commodities that constitute capital" [3]. It was not until 1988 that experts from the Financial Market Writing Group of the Head Office of the People's Bank of China pointed out that the difference between the short-term capital market and the long-term capital market is the difference of duration, and did not involve the difference of their risks. Therefore, it is reasonable for enterprises to pay attention to the concept of capital cost based on raising fee and occupation fee when financing under the background of the lack of risk-reward awareness in China's theoretical circles.
2.2 Whether it embodies a perfect modern corporate governance mechanism.
Principal-agent theory holds that in a company, the interests of company managers and shareholders are inconsistent. What company managers need is the maximization of personal income, the maximization of on-the-job resources to meet personal needs and obtain utility, and the maximization of self-value through operating the company. However, this maximization of interests may conflict with the maximization of shareholders' interests. Therefore, we must design the corresponding corporate governance mechanism to protect the interests of shareholders.
Under the perfect corporate governance mechanism, investors can protect their investment interests and form hard constraints on company managers. Once the company carries out equity financing on a large scale, the actual cost of capital paid cannot reach the cost of capital of the company with the same operating risk, and the return rate of the original shareholders will decline. The latter can use the restraint mechanism in corporate governance to restrain managers' behavior: either "vote with your hands" to veto the refinancing proposal or change the management at the shareholders' meeting, or "vote with your feet". Withdrawing funds from other investment projects will lead to the decline of the company's stock market value, which will make it vulnerable to hostile takeover, thus forming investors. This requires company managers to pay a minimum risk return rate when making financing decisions. At this time, the cost of equity capital will be forced to equal the cost of equity capital. In this case, the cost of capital and capital will tend to be consistent.
However, if there is no perfect corporate governance mechanism, investors will not be able to restrain the financing decisions of company managers. Under this soft constraint mechanism, the actual capital cost of the company's equity financing will be less than its equity capital cost, or even zero, thus seriously infringing on the interests of investors. At this time, the cost of capital and the cost of capital will become two completely divorced concepts.
In view of the imperfect corporate governance mechanism in China, there is a great difference between capital cost and capital cost: the concept of capital cost embodies the corporate governance mechanism to protect investors in modern enterprise system, while capital cost embodies the characteristics of "absence of owners" in China's state-owned enterprises.
2.3 From their respective historical backgrounds.
Since John. Williams, an American scholar, put forward a discount model of future cash flow in stock pricing in 1938, and the determination of discount rate, that is, the cost of capital, became a core issue. It was not until 1952 that H.Markowitz used the standard deviation of future returns to measure the risk of capital assets for the first time in portfolio theory that this problem surfaced. After CAPM model was put forward, capital cost, a static factor cost in classical economics, completely completed the transformation to dynamic cost. It can be said that portfolio theory and CAPM model reveal the relationship between the risk of capital assets and their expected rate of return, which marks the rapid development of financial theory and integrates corporate financial theory with investment theory.
Different from the capital cost in western financial theory, the capital cost is the product of China's economic system transition. Professor Jiang Yiwei first put forward the proposal of "paid use of funds", and the specific implementation measures were the reform of "changing funds into loans" starting from 1984. Facts have proved that state-owned enterprises have begun to have a sense of capital cost after "changing loans from loans", and their financial operation relationship looks a bit similar to the business behavior of enterprises under the real market economy. But it is only "a little similar" because "from appropriation to loan" is an attempt to let enterprises form and develop by loan in the absence of owners. Obviously, the cost of capital in this case has nothing in common with the cost of capital.
Theoretically speaking, state-owned enterprises have to pay a price for raising and occupying funds. The existence of the category of capital cost has its theoretical and objective basis, which is determined by the characteristics of funds themselves and the separation of ownership and use rights of funds. If China's economic system reform continues along the road of marketization, the cost of capital is likely to be converted into the cost of capital. However, the "loan-to-allocation" has not further promoted the marketization of state-owned enterprises. This is because banks that provide loans are not market-oriented. State-owned enterprises pursue state-owned bank funds unscrupulously, and the corresponding capital cost cannot restrain the effective demand of state-owned enterprise managers for funds.
1990 China Shenzhen-Shanghai securities market was established, which announced that China began to introduce the framework system of modern capital market. After the "change from appropriation to loan", the state finance actually injected little capital into state-owned enterprises. Now, if state-owned enterprises go public for financing, listed companies will naturally regard the funds raised from the stock market as the capital supplemented by the state free of charge, which makes financing alienated into money, so that the binding force of equity capital cost is not as binding as that of bank loans. Therefore, the cost of capital has always maintained a soft constraint on operators, and has never evolved into a hard constraint. Thus, it is the reform path of state-owned enterprises in China that determines that the cost of capital is different from the cost of capital.
3 The danger of confusing the cost of capital with the cost of capital in China
3. 1 Reasons for confusion between capital cost and capital cost Although capital cost and capital cost are very different in connotation and extension, they are often confused in China's financial theory and practice. The article "Analysis of Equity Financing Preference of Listed Companies in China" published by Huang Shaoan and Zhang Gang in Economic ResearchNo. 1 1 No.200 1 is a typical example. This paper holds that the total capital cost of equity financing of listed companies is CS, "including: stock investment dividend PS; Transaction cost of equity financing; Corporate control of equity financing and negative power cost CP: the negative cost brought by the advertising effect of stock listing-PA. " CS=∑(PS, CT, CP, -PA). Obviously, CS here should be the cost of capital rather than the cost of capital. In addition, Yuan, Zheng Jianghuai, Hu Zhigan (1999), Qiu (200 1) and many other textbooks have similar puzzles. The degree of chaos and the wide coverage can not be ignored.
First of all, when establishing the capital market in China, we only pay attention to the construction of the capital market structure and ignore the introduction of corresponding financial concepts. In modern financial theory, investment and corporate finance are inseparable whole. However, in order to solve the difficulties of state-owned enterprises, the capital market structure and investment scientific system were introduced, but the modern financial management thought including the renewal of the concept of capital cost was ignored. Under the catch-up capital market system arrangement, the capital market in China was established rapidly, and the debt financing system of low-end credit was quickly switched to the equity financing system of high-end credit. However, it is this compulsory institutional change that ignores the inherent development logic of the market that causes the coexistence and confusion of capital cost and capital cost.
Secondly, there are some mistakes in the guiding ideology at the initial stage of establishing a modern enterprise system. The cost of capital is the product of modern company system, and the establishment of modern enterprise system must consider the necessary remuneration of investors. Before 1992, all state-owned enterprises in China implemented the capital balance sheet system, and there was no concept of capital and net assets. During the period of 1992- 1995, according to the unified deployment of the central government, state-owned enterprises generally carried out the work of assets verification based on replacement cost method. On this basis, state-owned enterprises began to implement the balance sheet system and also had their first net assets. It can be seen that the first net assets of state-owned enterprises, namely capital, came out after 1992. China financial circles have only been exposed to the concept of capital for more than 10 years, and they are even more unfamiliar with the cost of capital, which represents the necessary remuneration of capital owners. In particular, there were some mistakes in the guiding ideology of reform during this period, which intentionally or unintentionally diluted the concept of capital cost. A speech by Zhou Xiaochuan, the former chairman of the China Securities Regulatory Commission, can be used as evidence: "Since the initial stage of reform was mainly to consider the decentralization of management rights to enterprises, there is a negative shareholder, that is, a tendency to weaken shareholders' rights and functions" [4]. Therefore, under this historical limitation, the capital cost representing the necessary remuneration of investors cannot be put in place, and the confusion between capital cost and capital cost is inevitable.
3.2 confusion between the two in the investment and financing decision-making hazards
In modern financial theory, the cost of capital is the intersection and foundation of company financing decision and investment decision, which can be called the core of modern financial theory. The cost of capital can only reflect the unilateral financing cost of enterprises. In the case of confusion between capital cost and capital cost, if capital cost is used in enterprise investment and financing decision, it will bring serious mistakes.
First of all, if enterprises use the cost of capital in financing decisions, there will be a phenomenon that the cost of equity capital is far less than the cost of debt capital. According to the Statistical Yearbook of China Securities and Futures in 2003, among the 668 companies that implemented cash dividends in Shenzhen and Shanghai in 2002, there were 120 companies with cash dividends below 25%, and as many as 184 listed companies with cash dividends below 0.05 yuan per share. In this way, the average yield of circulating investors is only 0.95%, which is less than half of the interest rate of national debt in the same period, calculated by the average price-earnings ratio of 40 times in the securities market that year. Even with the transaction cost of equity financing, the cost of equity capital of tradable shares is extremely low, far less than the cost of debt capital.
In this context, contrary to western countries, listed companies in China generally prefer equity financing. By the end of 2003, there were 23 corporate bonds 3 1 and convertible bonds listed on the Shanghai and Shenzhen stock exchanges, with a custody market value of 36.7 billion yuan and 22.2 billion yuan respectively. Looking at stock financing, by the end of 2003, the total number of shares issued by listed companies in Shanghai and Shenzhen stock markets was 642.846 billion, including 226.992 billion shares, and the total amount of funds raised (including the amount raised by A shares and the amount raised by A and B shares) was 65,438 yuan+0,065,438 yuan+0,365,438 yuan+72 million yuan [5]. The direct consequence of the super-strong financing function of the capital market is to distort the resource allocation function of the capital market: in the case of limited financing channels and a large number of enterprises competing for financing opportunities for listing, it is impossible to truly realize the mechanism of optimizing the allocation of resources according to the principle of marketization unless there are problems such as market administrative intervention and black-box operation.
Secondly, because the capital cost of enterprise financing is far less than the capital cost, if the capital cost is confused with the capital cost, it may be mistaken for the discount rate in investment project decision in practice, thus overestimating the net present value of the project, leading to the consequences of over-investment and waste of funds. The phenomenon of overheated investment in China in 2003 and the first half of 2004 is closely related to the indifference of capital cost consciousness.
Thirdly, the confusion of capital cost and capital cost has brought many negative effects to the construction of China's capital market [6]. For example, the operating risk level of tradable shares and non-tradable shares of the same listed company is the same, so they should all have the same capital cost. But from the perspective of capital cost, the capital cost of premium tradable shares is far less than that of non-tradable shares. Using the greatly underestimated capital cost of tradable shares as the discount rate of stock pricing will overestimate the theoretical price of stocks and delay the pricing progress of state-owned shares reduction.
Finally, because the cost of capital does not consider the return of investors, state-owned shareholders lack the motivation to restrain company managers. Under the background that the cost of capital does not exist, because the property right representative of state-owned shares is a government agency or its authorized state-owned holding company, its specific agent has no residual claim in law, so although it has the right to choose the board members and managers of state-owned enterprises, it does not have to bear any consequences for capital gains. This is also one of the important reasons why it is difficult to improve the corporate governance structure in China.
Capital cost is a concept of finance, which can't be confused with the concept of capital cost in accounting. The cost of capital reflects a sound corporate governance mechanism and respect for the return on capital risk. The cost of capital is a financial concept in the process of China's economic transition, and it has certain rationality both in its birth and in a period after it. However, we must be soberly aware that the emergence of the capital market is an epoch-making milestone. From then on, the value of an enterprise is no longer related to historical costs, but depends on the discount of future cash flows. At this time, the capital cost matching the risk degree should replace the capital cost and become the core concept in the investment and financing theory. Faced with the harm caused by the confusion between capital cost and capital cost, financial theorists should abandon the concept of capital cost as soon as possible and fully accept the concept of capital cost in line with international standards.