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The Role of Dividends in a Regulated Economy: the Case of China
Donghua Chen,
Ming Jian, Nanyang Technological University
Ming Xu, The Hong Kong Polytechnic University
ABSTRACT. The controlling shareholders of Chinese listed companies generally hold state or institutional shares with the same rights as those held by individual shareholders, and enjoy a significant price discount because these shares are not tradable in the stock exchanges. The price difference of these non-tradable shares makes the distribution of cash dividends a more important and favorable way for the controlling shareholders to divert resources from the listed companies to their own pockets. This paper shows that government-controlled companies, highly concentrated companies, and companies after rights issue tend to have higher dividend payout ratios. Furthermore, dividend increase accompanied with high IPO price discounts, rights issue qualifications and great dividend variation is associated with negative stock returns. All the findings indicate that dividends are not purely used for signaling in China. Instead, dividends might be used by controlling shareholders as a means of tunneling.
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