Empirical evidence on dividend policy in China

Most dividend policy literature is based on sample firms from mature economies such as the US, while a relatively smaller number of studies are conducted on the Chinese stock market. The empirical evidence from existing papers investigating dividend policies of Chinese listed firms is not conclusive (G. Chen et al., 2002; Deng, Li, Liao, and Wu, 2013; Lee and Xiao, 2002). It may be problematic to apply signalling theory to explain the cash dividend policy among Chinese listed firms because of their unique ownership structure. Indeed, before the non-tradable share reform, non-tradable shares (largest shareholders) account for around two thirds of outstanding shares and, therefore, the dividend policy reflects the incentives of the largest shareholders.

The first strand of papers examines the association between ownership structure and dividend policy. Specifically, Wei et al. (2004) based on a sample of 2985 observations during the period of 1995-1999, reports a positive correlation between largest ownership and cash dividend payments. This result is in contrast to the agency cost arguments that the more concentrated ownership is, the lower the agency cost, and the lower probability that firms will pay cash dividends. Wei, et al., (2004) further examine the effect of ownership structure on dividend payment policy and find that state ownership is positively related to cash dividend payments, while private ownership is positively related to stock dividends. The authors conclude that the managers of Chinese listed companies are likely to cater for the preferences of different shareholders. Wei and Xiao (2009) investigate how listed Chinese firms pay different types of dividends to satisfy shareholders. They find a preference for stock dividends by tradable shareholders, while non-tradable shareholders prefer cash dividends. The findings are consistent with Yanxin, Dagang, and Xiao (2007),

who find that non-tradable shareholders typically derive their return from cash dividends, while tradable shareholders benefit from short-term returns from stock dividends.

Zhang (2008) examines corporate governance and cash dividend policy by comparing Chinese firms listed in Hong Kong and on the Mainland. She finds a negative association between managerial ownership and cash dividends in both markets, however this relation is stronger in Mainland-listed firms. She further shows that ownership concentration in Mainland-listed-firms tends to weaken the association, indicating concentrated ownership in the Mainland firms reduces the agency cost. Furthermore, she shows that the dividend payout ratio is significantly related to a price premium in the Hong Kong market; however this is not the case in Mainland-listed firms, suggesting investors in the Mainland market do not necessarily value cash dividends. Additionally, Bradford, Chen, and Zhu (2013)

investigate cash dividend policy in pyramid ownership structures. They find firms with more layers of corporate pyramid structures tend to pay less cash dividends. The results are consistent with the internal capital market hypothesis that longer control chains can result in investable funds more fully utilised within firm pyramid groups, which is a well-known benefit of the internal capital markets for firms in corporate pyramids.

The second strand of literature applies signalling hypothesis to examine dividend policy in China.Chen et al., (2002) study 1232 pairs of earnings and cash dividend announcements, and 1142 pairs of earnings and stock dividend announcements, of Chinese listed companies from 1994 to 1997. They find cash dividends have a weak effect on the earnings signal, while stock dividend announcements have a significant earnings signal. Chen et al. (2009) also find the cash dividend announcement is positively related to share price, supporting the signalling theory. Anderson, et al., (2011) primarily focuses on the market action to stock dividend announcement. They find Chinese listed companies take advantage of positive stock dividend announcement reactions when they are cash poor and less profitable.

In addition, a paucity of academic research examines the link between expropriations and dividend policies. Lee and xiao (2002) show an inertial pattern of paying cash dividends among Chinese listed firms. They find that firms who pay cash dividends regularly are those who also regularly offer a lower payout ratio. They also find the level of cash dividends declines and their paying pattern weakens over time. They suggest that the behaviour of cash dividend payments in China is primarily driven by the market imperfection and the motive of large shareholder expropriation. Attempting to use the agency cost hypothesis to explain the dividend policy of Chinese listed firms, Chen, Jian

and Xu (2009) examine the determinants of exceptionally high cash dividend distributions by Chinese listed firms from 1990 to 2004. They provide evidence that firms with either wider differential pricing for IPOs, more ownership concentration, or ultimate government owners, are more likely to distribute high cash dividends. Their results support the view that cash dividend policy might be used as a form of tunnelling by controlling shareholders in China. Consistent with the tunnelling motive for issuing cash dividends, Su, Fung, Huang, and Shen (2014) show that firms with more related-party transactions pay less in cash dividends. The authors conclude that ownership structure determines dividend policies with respect to related-party transactions and political connections.

According to Anderson et al. (2011), the percentage of dividend payers increases from 38.53% during the period of 1990-1999 to 51.53% during the period of 2000-2008. This ratio is comparable to that observed in developed countries.

However, G. Wei and Xiao (2009) and Anderson, et al., (2011)both report that there is a significant increase in the proportion of listed companies that paid cash dividends and a decrease in the proportion of listed companies that paid stock dividends from 200011.

According to Anderson, et al., (2011), the incidence of cash dividend-paying firms is increasing even though the cash dividends payout ratio is lower than in developed countries. In their paper, the percentage of cash dividends paying firms increases from 24.17 during the period of 1990-1999 to 47.15 during the period of 2000-2008, while the cash dividends payout ratio drops from 0.45 to 0.14 (Julio and Ikenberry, 2004).