We investigate the impact of State ownership on Chinese corporate dividend policy. We find that Chinese firms' dividend payout rates respond fairly quickly to earnings changes, and the average actual payout ratio for Chinese firms falls between the payout ratios for emerging-market and developed firms. These results are consistent with the dividend policies of developing economies in general. We also find that dividend payouts among dividend-paying firms, and the likelihood that a firm will pay a dividend, are increasing in State ownership. Our findings are consistent with the State's need for cash flow as a partial motivation for continued State ownership of a significant portion of the corporate economy, and support the agency and tax clientele explanations for dividend policy.
Researchers have found that dividend-paying U.S. firms appear to pursue a stable dividend payout rate over time (Brav, Graham, Harvey, & Michaely, 2005). Researchers have also found that this characteristic of dividend policy applies in other countries as well (Chateau, 1979 and Leithner and Zimmermann, 1993; McDonald, Jacquillat, & Nussenbaum, 1975; Partington, 1984; Robinson, 2006; Shevlin, 1982). Several theories have been developed to explain why firms might prefer to follow a stable payout policy. While much is known about dividend policy in the U.S. and Western economies, dividend policy in China is largely unexplored. Using firm data from the Chinese stock market, we examine dividend policy of Chinese firms from 1998 through 2008.
We find that Chinese firms' dividend payout rates respond fairly quickly to earnings changes, consistent with the dividend policies of developing economies in general. Moreover, the average actual payout ratio for Chinese firms is between the average payout ratios for emerging-markets firms and developed firms (Glen et al., 1995).
One may regard ownership by the State as similar to that by any large investor, but with key differences.3 While payments of cash dividends attenuate the inherent agency problem in corporate organizations, dividend payments have also been associated with large shareholders using their power and position to appropriate the wealth of the firm from individual investors.
Consistent with the State's need for cash flow as a partial motivation for continued State ownership of a significant portion of the corporate economy, we find that the strong preference for cash dividend payouts among dividend-paying firms is increasing in State ownership. We also find that the likelihood that a firm will pay a dividend is increasing in State ownership. These findings provide support for the agency theory of dividend policy in that dividend payouts enable the State to extract disproportional benefits from corporate enterprises.4 Alternatively, we find a diminished cross-sectional incidence of dividend payouts as State ownership declines, suggesting that the preferential tax treatment of capital gains in China provides at least a partial explanation of dividend policy among Chinese firms. Taken together, these results provide support for both the agency and tax clientele theories of dividend policy.
China is becoming increasingly important in the global economy. However, much remains unknown about the interactions among China's corporate policies, tax rules, and the role of the State. Our research contributes to the growing literature on the Chinese corporate economy by extending knowledge of the influence of the State on dividend payout policies in China.
We find that Chinese firms' dividend payout rates respond fairly quickly to earnings changes, and the average actual payout ratio for Chinese firms falls between the payout ratios for emerging-market and developed firms (Glen et al., 1995). These results are consistent with the dividend policies of developing economies in general. We also find that the preference for (and likelihood of) cash dividend payouts among Chinese firms is increasing in State ownership, consistent with the State's need for cash flow as a partial motivation for continued State ownership of a significant portion of the corporate economy.
While payment of cash dividends attenuates the inherent agency problem in corporate organizations, the payment of cash dividends is also consistent with the large shareholder using its power and position to appropriate the wealth of the firm from individual investors. Alternatively, as State ownership declines, we find a diminished incidence of regular cash payouts, suggesting that the preferential tax treatment of capital gains in China provides at least a partial explanation of dividend policy among Chinese firms. Taken together, these results provide support for the agency and tax clientele theories of dividend policy.
