State expropriation, reform and cash dividends

Abstract

China?s capital market has undergone a tremendous change in the past six years, and thus has become a significant force in emerging capital markets. In spite of numerous works concerning cash dividends, a fascinating yet unresolved area of corporate finance, my research on the relationship between the nature of ultimate controller and cash dividends distribution might contribute to prior literature from a fresh Chinese perspective. To understand key implications, I use a panel of 4609 firm-year observations from 2003 to 2008, and find evidence that Chinese listed firms ultimately owned by local governments, compared to other two types of firms, tend to issue more cash dividends on average, which indicates that controlling shareholders are expropriating minority shareholders. However, such local-government-controlled firms are inclined to pay less cash dividends after the split-share structure reform, mitigating the state expropriation phenomenon and justifying the reform. I also find moderate evidence that after the reform, firms controlled by local governments reduce their cash dividends more than other firms do.