Empirical Analysis of Cash Dividend Payment in Chinese Listed Companies

1. 
   Research Background
   

Dividend policy, one of the three corporation financial decisions, has been concerned among theoreticians and practitioners. John Lintner (1956) brought forward a model of dividend adjustment.¹ According to the model, a firm that is currently paying dividends at the rate of DPS_t, and that has a target payout ratio of POR, will adjust (ADJ) its dividend rate, but less than fully, as its earnings per share (EPS) changes. Modigliani and Miller (1961) argued that dividend policy has no effect on either the price of a firm’s stock or its cost of capital, in a perfect world, the dividend policy is irrelevant to shareholders wealth. This proposition has laid a solid theoretical foundation for the dividend policy. After that, economists have offered explanations in different ways about dividend payment, such as effect of taxes, dividend signaling, agency costs issues and transaction costs. Over decades, economists could not come to an agreement. Thus, Black, Fischer (1976) gave it a name “dividend puzzle”.

In China, the dividend policy of listed companies has its unique characteristic in the strong emerging market economy if comparing the type of dividend payment in China with the type used in developed countries. In addition to cash dividend and stock dividend, several mixed types of dividend payment derive from cash dividend and stock dividend such as mix of bonus issues and dividend, mix of rights issues and dividend, According to China Securities Journal’s relative statistical data, there are more listed companies who adopted the pattern of stock dividend in 1993 which were 36%, and more listed companies adopted cash dividend policy during 1994 and 1995 which were 40% and 36% respectively. The companies that paid no dividends account for 35%, 54%, 59% and 62% respectively during the period of 1996 and 1999. The proportion of total listed companies that adopted cash dividend increased from 47% to 54% during 2000 and 2001.

In this situation, in order to resolve the “dividend puzzle”, many Chinese scholars have done a number of empirical studies. Two main approaches were taken in these studies:

First, using event study method to analyze the influence of different dividend policy on share price and the value of a firm. Wei Chen et al (1999) empirical analyzed the dividend policy of Shanghai stock market by the method of Cumulative Abnormal Return (CAR) and study the existence and character of the signaling effect of dividend policy in this market. This study showed that the degree of CAR was very different from different dividend policy. The CAR of right issue was higher than cash dividend but lower than bonus. Yu Qiao et al (2001) found that there was evidential positive statistical relationship between the dividends and mix dividend policies of firms on the stock market. But their study showed that the market was not sensitive with cash dividends. This phenomenon is opposition with the result being observed in developed countries’ mature markets. Gang Wei (2000) found that dividend policy often signal the information of long-term earnings about a firm for investors.

Second, based on diversified dividend policy theories, analyzers analyzed dynamic reasons of dividend policy, and tried to find impact of dynamic factors (such as ownership structure, the size of assets, profitability, ability of growth, ability of repayment, consumer preference and agency problem, etc) and influencing extent on dividend policy of firms. Different point of view offered different significant conclusions. For example, cash dividend may be affected by currency balance and retained earnings, and has positive relationship with them (Yang, 2000); different size of firms choose different pattern of dividend: small firms tend to choose stock dividend, while large firms prefer cash dividend (Yan, 2001; Zhao, 2001). If the firms have lower proportion of holding state shares and corporative shares and the stronger self-growth and development of firms, the firms enjoy the higher stock dividend payment, and also the lower cash dividend payment (Lu, 1999).

Domestic theoretic and empirical researches based mostly on profit flow (net income, EPS or retained earnings) investigated the dividend policy, and ignored the effect on cash flow. In fact, cash dividend distribution not only depends on profitability of firms, but also depends on free cash flow to firm. Compare profit flow with cash flow, the latter not only express the value which has been created by firm, but also express how many value that has been realized. From the point of view of cash flow to analyze it , it can patch the faults of profit flow (accounting policy choice, earning management), and declare real relationship between cash flow and the ability of cash payout.

Recently, more and more investors prefer cash flow, because of the idea that “cash is king” which have become many managers’ conception. Therefore, this paper seeks to analyze the problem of cash dividend payment from the cash flow point of view, and three questions answered in this paper: (1) How much cash will be distributed to shareholders by paying a cash dividend after all expenses. What is the actual dividend? (2) Why is the cash dividend payment higher or lower than cash flow? What are the factors that affect cash dividend payment? (3) What are the features of cash dividend payment in different industries?

The sample was cross section data of companies listed on the China (Shanghai and Shenzhen) Stock Exchanges in the end of 2000. 299 listed companies were randomly chosen; Special Treatment (ST) and Particular Transfer (PT) companies were not included. The accounting data was obtained from listed companies’ annual reports, which were published on the web site (http://www.csrc.gov.cn) of China’s Securities Regulatory Commission (CSRC), others were obtained from the web site: http://www.cninfo.com.cn, and Shenglong software.

1) Ability of cash dividend payment analysis. Sample descriptive statistics is presented in Table 2.

According to the EPSR and FCFER, the 209 firms were divided into 11 groups, the statistical analysis shows that cash dividend payout ratio of the most firms were between 20%~50%, this means cash dividend payment is lower than accounting profit or book value; there are 50 percent of sample firms that cash dividend payment are higher than the FCFE. This situation is revealed as figure follows (Figure 1).

2) Cash dividend payment on relative variables. From the relationship between the cash dividend payment and each variable, the relationship between cash dividend payment and EPS, However, the non-significant relationship between cash dividend payment and FCFE found in Table 3.

Firstly, the payment of cash dividend is usually less than accounting profit in Chinese listed companies, but quite a number of listed companies which had more payment of cash dividend than free cash flow to equity, the gap between cash dividend and FCFE is right issue. By theory, the phenomenon of both cash dividend and right issue is contrary to basic regulation of corporate financial management. This phenomenon of self-contradiction² may be related to the rule by China security commission in 2000, which the listed companies must have cash dividend payment last three years while they finance by adding shares or right issue. In contrast, cash dividend payment in some listed companies were less than free cash flow to equity, which is result in forming cash storage in these firms. In China, dividend payment of firm can be described as: the firms have very few cash dividend payment and more stock dividend payment, while some firms have not paid any dividend . This is maybe one of the evidences that Chinese stock market full of speculation and unfair financing from stock market.

Secondly, payment of cash dividend in Chinese listed companies is relevantly positive for current return per share and total assets but negative for debt to asset ratio. For the index of cash flow, it is closely related to the payment of cash dividend and net operating cash flow; the index of free cash flow to equity is irrelevant . This is because listed companies understand the index of free cash flow to equity in significant limit, they seldom use free cash flow. Additionally, the payment of cash dividend is irrelevant to non-outstanding shares.

Lastly, comparatively, the results indicate that firms with a higher ROE, ONCF and higher cash dividend payment belong to traditional industry; the firms with a higher ROE , lower ONCF and lower cash dividend payment belong to high-tech industry. We find there are quite many firms, which cannot make enough residual cash flow, but they still invest big projects. They return back cash dividend to shareholders by financing from stock market. Other firms with little investment opportunity have plenty of cash flow but no cash dividend payment, still finance too. These phenomena should be paid more attention to.

Shulian Liu, Yanhong Hu

School of Accounting

Dongbei University of Finance and Economics

Dalian, Liaoning, China

Telephone: 0086-411-8471-2716

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