Why Do Firms Pay Stock Dividends, Is It Just Stock Split

553858
research-article2014
AUM0010.1177/0312896214553858Australian Journal of ManagementHe et al.
Article
Why do firms pay stock

dividends: Is it just a stock split?
Australian Journal of Management

130
The Author(s) 2015
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DOI: 10.1177/0312896214553858
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Xi He
Research School of Finance, Actuarial Studies & Applied Statistics, The Australian National University, Australia
Mingsheng Li
College of Business Administration, Bowling Green State University, USA
Jing Shi
International Institute for Financial Studies, Jiangxi University of Finance and Economics, Jiangxi, China; School of
Economics, Finance and Marketing, RMIT College of Business, RMIT University, Australia
Garry Twite
Department of Finance, University of Melbourne, Australia
Abstract
This paper examines why firms choose to pay stock dividends. Using a sample of listed Chinese
firms we find that older, more profitable firms with lower leverage, higher levels of retained
earnings, private ownership prior to listing, that invest more in fixed assets and operate in regions
with lower shareholder protection are more likely to pay stock dividends. Consistent with stock
dividends substituting for stock splits, our evidence indicates that the initiation of a stock dividend
is associated with a significant positive market reaction and increased analyst following. These
results suggest that firms use stock dividends to attract analysts attention. In addition, the positive
announcement effect for stock dividends increases with the size of the split factor, suggesting that
management use stock dividends to keep the firms stock price within its acceptable trading range.
JEL Classification: G35, G14
Keywords
Dividend policy, stock dividend, stock split
Corresponding author:
Jing Shi, School of Economics, Finance and Marketing, RMIT College of Business, RMIT University, Melbourne, VIC 3000,
Australia.
Email: Jing.Shi@RMIT.edu.au
Final transcript accepted 24 August 2014 by Tom Smith (AE Finance).
Downloaded from aum.sagepub.com at CMU Libraries - library.cmich.edu on November 2, 2015
1. Introduction
What motivates a firms decision to pay a stock dividend? Firms have multiple methods to distribute back to shareholders, such as paying cash dividends, stock dividends, or repurchasing shares.
In the past 50 plus years, a large body of literature has heavily focused on the analysis of cash dividends, although many puzzles still remain unsolved and there is no consensus conclusion. The
main explanations for paying cash dividends include: (1) signaling future profitability (Bhattacharya,
1979; Miller and Rock, 1985); (2) reducing free cash flow and mitigating agency problems
(Easterbrook, 1984; Jensen, 1986); (3) minority shareholders pressuring corporate insiders to disgorge cash (La Porta etal., 2000); and (4) catering to investors when they put a stock price premium on dividend payers (Baker and Wurgler, 2004).1
Given that paying stock dividends, in essence, does not increase shareholders wealth directly,
nor does it change the percentage ownership of current shareholders (as it simply increases the total
number of shares outstanding), it is unclear why many firms still choose to pay stock dividends and
how investors react to such events. In the current study, we investigate the motivation of paying
stock dividends and related issues by exploring two competing hypotheses: stock split substitution
versus cash dividend substitution.
Firms may use stock dividends as a substitute for stock splits for three possible reasons: (1)
signaling managers revised expectations of the firms future prospects (Grinblatt etal., 1984;
McNichols and Dravid, 1990); (2) communicating between firms and investors and attracting
the attention of market participants (Almazan etal., 2008; Grinblatt etal., 1984); and (3) enabling the firm to adjust the share price to a more appropriate range and thus increasing the
shares liquidity (Copeland, 1979; Lin etal., 2009; McNichols and Dravid, 1990). Alternatively,
stock dividends can also be used as a substitute for cash dividends for firms wishing to maintain
a dividend history when they are unable or unwilling to pay a cash dividend (Lakonishok and
Lev, 1987).
However, under normal market conditions, it is hard or impossible to identify whether a firm
pays stock dividends substituting for stock splits or for cash dividends. The current study contributes to the literature by employing a unique Chinese sample that helps us unambiguously identify
the motivation of paying stock dividends. Specifically, splits are prohibited under the Company
Law of the Peoples Republic of China. Thus, if a firm desires stock splits for any of the abovementioned considerations, issuing stock dividends is the only avenue for it.
This study also builds on the existing literature by investigating the influence of managements
response to investor demand in setting the firms dividend policy. In the USA and many other
countries, firms may use cash dividends as a strategy to mitigate potential agency problems. In
contrast, paying cash dividends in China may be an outcome of agency problems rather than a
means of mitigating agency problems, since Chinese firms are characterized by a large portion of
non-tradable shares and the dividend is the primary source of investment return for the nontradable shareholders.2 The extent to which cash dividends are set to cater to the demands of nontradable shareholders weakens the effectiveness as a signal.
Therefore, under the unique Chinese circumstances (i.e. prohibition of stock splits and preference of cash dividends by non-tradable shareholders), investors would react differently to stock
dividends depending on whether the stock split substitution hypothesis or the cash dividend substitution hypothesis holds. If a firm pays stock dividends just for the purpose of establishing dividend
history or substituting for cash dividends, investors are expected to react weakly or negatively to
stock dividends. In contrast, if a firm pays stock dividends substituting for stock splits for the
abovementioned reasons in the context of the Chinese environment, the stock split substitution
hypothesis predicts a positive market reaction.
He et al.
Figure 1. Market adjusted cumulative abnormal returns around the announcement date of the proposed
dividend distribution scheme.
In addition to relying on the market reaction to distinguish between the two competing hypotheses, we also investigate how firm characteristics influence the choice between stock and cash dividends. In particular, stock dividends are likely to be paid by firms facing high levels of information
asymmetry, which seek the attention of financial analysts (Almazan etal., 2008; Brennan and
Hughes, 1991; Grinblatt etal., 1984). Unlike cash dividends, stock dividends do not affect the firms
future cash flow or internal financing. However, in line with cash dividends, stock dividends reduce
the current level of retained earnings. If the attention argument holds, we expect to see a positive
announcement effect and an increase in analyst following when firms initiate stock dividends.
To understand our conjecture, we use a sample of 5153 dividend announcements by Chinese
firms between 2003 and 2007, and plot the market adjusted cumulative abnormal return from t =
5 to t = 30 days for dividend payers and non-payers, where t = 0 is the announcement day of the
proposed dividend distribution scheme. We further divide dividend payers into three groups: firms
paying only stock dividends (stock-payers), firms paying only cash dividends (cash-payers), and
those paying both cash and stock dividends (cash and stock payers). As is shown in Figure 1, the
market responds in a similar way to both non-payers and cash dividend payers. However, the
response to the announcement of stock dividends (either separately or combined with a cash dividend) is both positive and significant, suggesting that the market views stock dividends as good
news, relative to both cash dividends and the absence of a dividend payment.3 The question
remains, why do firms choose to pay stock dividends?
Our evidence suggests that more profitable, lower levered, higher cash holding firms, and those
that face stronger shareholder protection and undertake subsequent equity offerings, are more
likely to pay dividends. In addition, we find that older firms with high levels of retained earnings,
private ownership prior to listing, that invest more in fixed assets and operate in regions with lower
shareholder protection, are more likely to pay stock dividends.
Overall, the results with respect to the market reaction to the announcement of a stock dividend
are consistent with the stock split substitution hypothesis. We find that the positive and significant
announcement effect for stock dividends is mainly related to the initiation of stock dividends. For
those firms initiating stock dividends, analyst following increases significantly after the dividend
announcements. In contrast, firms continuing to pay a stock dividend do not show an increase in
analyst coverage post the dividend announcement. These results are consistent with the argument
that firms use the initiation of stock dividends to communicate with investors and attract the attention of analysts (Almazan etal., 2008; Grinblatt etal., 1984).
Finally, consistent with management making use of stock dividends to keep the firms stock
price within its acceptable trading range, we find that the positive announcement effect for stock
dividends increases with the size of the split factor (Lin etal., 2009; McNichols and Dravid, 1990).
2. Institutional background: discussion and implications

2.1. Dividend payment
There are two types of dividend payments in China: stock dividends and cash dividends. Stock
dividends can be further classified into capitalization of reserve funds (CRFs) and pure stock dividends. The pure stock and CRF dividends differ in both accounting and tax treatments, depending
on whether the source of the dividends is reserve funds or retained earnings. Pure stock dividends
are distributed from retained earnings and are viewed as a distribution of earnings. Hence, they are
taxable, in the same manner as cash dividends.4
The CRFs generally comes from either capital reserve funds or surplus reserve funds (i.e. the
Surplus Reserve Fund (SRF) and the Other Surplus Reserve Funds (OSRF).5 It is viewed as a distribution of equity capital and, therefore, non-taxable.6 Since the CRF represents a distribution of
equity capital rather than a dividend payment, we exclude CRF dividends from our sample.
2.1.1. Implications. The ownership structure of Chinese firms is characterized as state-controlled
and closely held (Lin etal., 1998) with a large proportion of non-tradable shares, where nontradable shares account for almost 60% of the total number of shares outstanding (Calomiris etal.,
2010; Chen etal., 2009; Gao and Kling, 2008). For these non-tradable shareholders, the cash dividend payment is generally the primary source of return since their shares cannot be traded in the
open markets.7 Hence, non-tradable shareholders may pressure firms management to pay cash
dividends. We proxy for investor demand using the number of non-tradable shares over total number of shares outstanding (NT/TS).
2.2. Dividend declaration procedures

Based on the firms financial performance at the end of the previous year, at a declaration date, the
Board of Directors proposes a Profit Distribution Scheme (PDS), which is announced at the same
time as the annual report. The proposed PDS is then submitted to the Annual General Meeting
(AGM) for approval. The announcement includes both the form (cash or stock or both) and level
of the proposed dividend (zero and above).
Following the AGM, the final PDS is submitted to the China Securities Depository and Clearing
Corporate Limited (CSDCC) for assessment and approval. After approval from the CSDCC, the
firm will announce a share registration date, ex-dividend date, and comprehensive details on the
final PDS.
He et al.
2.2.1. Implications. The prescribed announcement procedure provides a clear distinction between
cash dividends and stock dividends. This allows us to examine the different forms of dividend
announcements (i.e. stock or cash dividend) to confirm the influence of firm characteristics and
institutional structures on dividend policy.
With respect to information asymmetry, it is well known that Chinese markets are characterized
by opaque information disclosure (see Bai etal., 2004; Lin etal., 1998). Within this context, the
existing literature suggests that stock dividends are an effective way of signaling a reassessment of
firm value, whereby stock dividends are paid by firms facing high levels of information asymmetry
and firms believing themselves to be undervalued (Brennan and Hughes, 1991; Grinblatt etal.,
1984). In addition, within the context of the Chinese market, the payment of a stock dividend
results in a change to the firms distributable funds. Specifically, retained earnings are transferred
to equity capital, suggesting that stock dividends may be costly to the firm and can restrict the ability of the firm to pay cash dividends in the future. An alternative view that does not rely on costly
signals argues that management may choose to disclose information via stock dividends as a form
of cheap talk communication between firms and investors (Almazan etal., 2008).
We conjecture that undervalued firms are more likely to be high-growth firms, since these firms
are more prone to information asymmetry problems and the growth option tends to be idiosyncratic
to these firms. Thus, there is little to be learnt about the firm from its competitors or the market in
general (Aboody and Lev, 2000). Accordingly, we argue that both stock dividend and non-dividend
paying firms may face growth opportunities and exhibit high levels of information asymmetry, but
stock dividend paying firms use the dividend announcement to attract analysts, having achieved
operating milestones that allow analysts to verify the quality of the investments. Therefore, we
conjecture that stock dividend paying firms have higher growth, are more profitable, have higher
retained earnings, and invest more in fixed assets.
This further suggests that the market response to the initiation of a stock dividend will differ
from the decision to continue paying a stock dividend. In particular, we argue that the initiation of
a stock dividend signals the marketallowing for verification of the quality of the investments by
analysts. However, the continuation of a stock dividend does not serve the same signaling role.
Thus, the growth signal embedded in paying stock dividends, combined with the role played by
analysts, suggests that the initiation of stock dividends are associated with positive market reactions. In this study, we use the number of the Institutional Brokers Estimate System (I/B/E/S)
analysts making one-year earnings forecasts as a proxy for financial analyst coverage.
Unlike stock dividends, cash dividends may not be growth related; hence, investors might react
differently from stock dividend announcements. Furthermore, as we argued previously, paying
cash dividends may be a way that firms compensate and cater to non-tradable shareholders. This
action by management is not seen as in the interest of public investors; hence, we expect that cash
dividend announcements will be associated with negative market reactions.
It may also be the case that stock dividends do not serve a signaling role. Rather, management
makes use of stock dividends to achieve a stock split, keeping the firms stock price within its
acceptable trading range. We proxy for trading range using the split factor attributable to stock
dividends (Split), measured as the number of shares outstanding after the stock dividend divided
by the number of shares outstanding before the stock dividend.8 We conjecture that the split factor
will be positively related to dividend announcement returns.
2.3. Regulation of dividend policy and equity financing in China

In the past decade, most Chinese listed companies were in a rapid growth phase with a focus on
capital accumulation and expansion. Hence, fewer initiations and lower dividend payments were
generally observed (Shao and Lin, 2004). As a result, the China Securities Regulatory Commission
(CSRC) has sought to encourage listed companies to establish long-term dividend payment policies with an aim to promote cash dividend payments.
In March 2001, the CSRC released the Measures for the Administration of the Listed Company
Issuing New Shares and stated that the underwriters of common equity must pay close attention
to the refinancing applications (i.e. right issues, seasoned offerings and convertible bond issues, as
defined by the CSRC) by the companies who failed to pay dividends in the past three years and
whose Boards of Directors provided no justifiable explanation. This was the first time in China that
the CSRC formally attempted to regulate dividend payments. However, the CSRC did not specify
the types of dividend (i.e. cash dividend or stock dividend) to be paid. More importantly, the payment of dividends was not mandatory as long as the companies Boards of Directors provided
satisfactory explanations for failing to pay dividends.
In December 2004, the CSRC went one step further by stating that company refinancing will not
be approved if dividends were not paid in the past three years. Moreover, in line with the
Administrative Measures for the Issuance of Securities by Listed Companies promulgated in
May 2006, the CSRC further stated that the issuance of new shares by listed companies shall be
consistent with the provision that the companies accumulatively distributed cash or stock dividends over the past three years must be higher than 20% of the average realized annual distributable profits.
In October 2008, the CSRC introduced a significant regulatory change designed to relate cash
dividends directly and exclusively to refinancing. The Decisions on Amending Some Provisions
on Cash Dividends by Listed Companies reinforced that companies seeking external finance must
comply with a provision where the companys accumulatively distributed cash dividends in the
past three years must be higher than 30% of the average realized annual distributable profits, in
contrast to previous rules in the Administrative Measures for the Issuance of Securities by Listed
Companies in 2006, which allowed listed companies to pay dividends in either cash or stock. This
change has the potential to significantly impact on the firms decision to pay stock dividends.9
2.3.1. Implications. Given the strong incentive of the Chinese Government to regulate dividend payments of listed companies since 2001, we expect that firms will establish a history of dividend
payments prior to seeking external equity financing. As identified by Chen etal. (2009), this suggests a positive relationship between the level of tradable shares, subsequent equity financing, and
dividend payments.
Accordingly, we argue that the initiation and continuation of dividends serve different signaling
roles and have different market reactions. Initiation of dividends signals the market with respect to
the revaluation of the firms growth potential, while continuation of dividends in part meets the
requirement of establishing a history of dividend payments prior to external equity financing. We
proxy for the firms external equity financing using the total number of successful new issues conducted within three years after the dividend announcement (# of new offers).10
In addition, we anticipate differences in the forms of dividend, that is, cash or stock dividend.
The choice of cash or stock dividends can be directly affected by the firms growth potential and
investment. For high-growth firms that require external financing, paying a stock dividend is the
optimal choice as it meets the dividend requirement for external financing while allowing for the
retention of internal funds for ongoing investment.11 In contrast, while paying a cash dividend also
meets the governments requirement for external financing, it consumes cash and reduces internal
funds available for investment opportunities, ceteris paribus. Thus, to the extent that raising external financing is costly and stock dividends meet the governments external financing requirement,
we expect that growth firms are more (less) likely to pay a stock (cash) dividend.
He et al.
Further, the incentive to seek analyst attention is likely to be strongest at the time of external
equity financing, when the incentive to reduce information asymmetry is the greatest. Given the
above, we would expect a positive relationship between subsequent equity capital raisings and
stock dividend payments.
3. Firm characteristics and dividend policy

Our choice of analyzing the influence of firm characteristics on the propensity for paying various
types of dividends is motivated by the existing empirical literature. In particular, prior studies suggest that the firms investment, capital structure, and dividend policies are interrelated. Following
Aivazian etal. (2003), we include a set of firm variables that captures factors known to influence
dividend policy. Firm size is a proxy for financial market access; larger firms tend to have better
market access and should be able to pay higher cash dividends. In our study, firm size is measured
by total assets (TA).
The literature also suggests that a direct link exists between growth, profitability, and financing
needs (Aivazian etal., 2003). More specifically, high-growth firms are generally cash poor and pay
lower cash dividends, while more profitable firms with slow growth are cash rich and pay higher
dividends. We utilize two proxies for growth opportunities: fixed asset growth rate (FA growth
rate), defined as the annual growth rate of gross fixed assets, and the total amount of cash spent on
construction over total asset (CSC/TA). Return on assets (ROA) is used to measure profitability.
The firms ability to pay dividends is influenced by both distributable profits and cash holdings.
We proxy for the level of distributable profits using retained earnings per share (REPS), and a
dummy variable, DProfit. DProfit takes a value of one if there is an increase in a firms distributable profits, and zero otherwise. To measure a firms cash position, cash holding (Cash/TA) is
defined as the sum of cash, cash equivalent, and short-term investments scaled by total assets.
In contrast to developed markets, Chinese listed companies tend to be younger and in a rapid
growth phase with a focus on capital accumulation and expansion (Shao and Lin, 2004; Wei and
Jiang, 2001). Hence, we posit that young firms are less likely to pay cash dividends. As a result, we
include firm age (Age), which is measured as number of days since the first day of listing, expressed
in years. The requirement that firms establish a history of dividend payments prior to seeking
external equity financing suggests that the most relevant timeframe for the firm may be the occurrence of the first successful new equity issue. Hence, we include an alternative measure of firm
age, SEOAGE, which is measured as the number of years between a firms first seasoned equity
offering and its initial public offering (IPO), expressed in the number of years.
To reflect the level of state control of corporations in the Chinese markets, we include a dummy
variable (Private) that takes a value of one if a firm is a private firm (i.e. not a state-owned enterprise) before listing, otherwise it takes a value of zero. We conjecture that previously state-owned
firms paying cash dividends signal their separation from their previous state government and, in
particular, that the level of cash flows attributable to the state government has been reduced from
their pre-listing levels. To the extent that payment of a cash dividend is a substitute for the reduced
cash flows, we posit that state-owned firms have a strong incentive to pay cash dividends. To test
this relationship we include the level of government ownership (GV/TS), measured as the number
of government shares relative to the total number of shares outstanding. In addition, we interact
this measure with the Private dummy. To reflect the substitution between dividend payments and
debt financing, we include firms financial leverage, measured as the book value of debt to equity
ratio (DE).
The existing literature (Aivazian etal., 2003; La Porta etal., 2000; Mitton, 2004) suggests that
stronger shareholder protection and corporate governance are associated with higher cash
dividends rather than stock dividends. Using a sample of Chinese firms, Sen etal. (2009) find that
the propensity to pay dividends is associated with weaker governance, where governance is proxied by the percentage of outside directors on the board. This proxy is problematic, as the government largely controls directorships of Chinese listed firms (Fan etal., 2007).
Differing from previous studies, we focus on two measures of shareholder protection: the level
of corruption and the extent of property rights protection. We measure the level of corporate corruption using the Entertainment and Travel Costs (ETC) index composed by Cai etal. (2011).
This index measures the extent of corruption payments by the firm to government officials, aggregated by provincial regions. Higher index values are associated with higher levels of entertainment
and travel payments (i.e. higher corruption). In the context of the firms dividend policy, the ETC
index proxies for the threat of all or part of shareholder rights being expropriated by management
or public officials. Thus, a large ETC implies weak corporate governance. Each firm in the sample
is assigned a corresponding provincial ETC value based on the location of the firms main
operations.
We also include a second measure: the property rights protection index. Djankov etal. (2003)
identify the protection of property rights as a key factor shaping the structure of contracts, where
legal systems evolved to protect private property rights facilitating the ability of individual shareholders to protect their cash flow entitlements. The index of property rights protection (also
developed by Cai etal., 2011) measures the extent to which the legal system of each provincial
region protects the property rights of individuals. A high index value implies a high level of protection of individual property rights. In the context of the privately controlled firms dividend
policy, the property rights protection measure (PP) proxies for the effective pressure by individual shareholders to force corporations to distribute cash dividends. Each firm in the sample is
assigned a corresponding provincial property rights protection value based on the location of the
firms main operations.
The existing literature suggests that geographic location influences a firms information environment and, as a consequence, its dividend policy (John etal., 2011). The existence of asymmetric
information together with the weaker monitoring of management in the more remote provinces
increase the likelihood of management using free cash flow to undertake inefficient investment
decisions, for example, empire building. To mitigate this inefficient investment, investors are
expected to demand higher cash dividends.
As noted by John etal. (2011), the presence of institutional investors facilitates the revelation
and dissemination of information and improves the monitoring of management. However, these
roles may be impeded by the firms location, in particular, the remoteness of the firm relative to the
location of the institutional investors.
To test this relationship, we measure the level of institutional investment as the provincial institutional shareholdings (InstHolding), obtained from GTA Data Services China Stock Market and
Accounting Research database (CSMAR). We first identify the proportion of the top 10 institutional holdings in each firm, then we sum this measure by province according to the location of the
firms main operations, and each firm in the sample is assigned the corresponding provincial
value.12
4. Data and sample selection

The data was collected from GTA Data Services (CSMAR), including top 10 institutional and retail
shareholding information, firm characteristics, and companys financial statement data. To ensure
data accuracy and recovery of missing information, we cross-checked GTA data with various
He et al.
sources, such as databases compiled by SinoFin Financial Information, China Merchants Securities,
China Finance Information, and Eastmoney.com.13
The initial sample consists of 6584 firm-year annual dividend announcements during the period
from 2003 to 2007.14 Among the 6584 firm-year dividend announcements, 315 observations have
missing information on financial report dates and these observations are removed from the sample.
Finally, we apply various filters to mitigate possible data errors that could not be recovered through
cross-checking. The final sample consists of 5153 firm-year observations.
We identify firms as dividend payers or non-dividend payers. Non-dividend payers are firms
that do not pay any type of dividend in a given year, while dividend payers are firms that pay any
type of dividend (cash or stock or both) in the current year. Within dividend payers, we identify
stock dividend payers as those firms that pay stock or both stock and cash dividends and cash dividend payers as those firms that pay cash dividends only.
5. Empirical results
In this section, we first investigate whether the institutional variables and firm characteristics discussed in Sections 2 and 3 influence the likelihood of paying dividends, different forms of dividends, and market reactions to various dividend announcements.
5.1. Firm characteristics

The composition of the dividend announcement sample is reported in Table 1. The sample is categorized by the form of the dividend (cash, stock, or stock/cash combination) and whether the
subsequent dividend payment increases, decreases, or remains unchanged relative to the current
dividend payment.
Of the 5153 dividend announcements, 49% represent non-dividend payments, while 46% are
cash dividends (Panel A). For both cash and stock dividends, a large proportion of dividend payments are followed by a smaller dividend in the next period. Among the sub-sample of cash payers,
53% of firms decrease the subsequent dividend payment while only 26% increase the subsequent
dividend (Panel B). For stock dividend payers, 87% of the firms decrease the stock component,
while 58% of firms decrease the cash component. With respect to announcement return (Panel C),
we observe that the mean market-adjusted cumulative abnormal return around the announcement
of a stock dividend is positive for both dividend increases and decreases, and is consistently greater
than the corresponding cash dividend announcement.
Summary statistics (mean values) of firm characteristic variables are reported in Table 2. We
observe a large difference between cash and stock dividend payments. The mean dividend per share
is only 0.14 yuan for cash dividend payers, which is equivalent to a dividend yield (mean dividend
per shares over mean share price) of 1.76%. In contrast, the mean stock dividend per share is equivalent to 3.97 yuan.15
It is clear from Table 2 that dividend paying firms are younger, larger, more profitable, have
lower leverage, higher cash holdings, and spend more cash on construction than non-dividend paying firms. In addition, dividend paying firms have higher retained earnings, reflecting a greater
ability to pay stock dividends. These results are in general consistent with the existing literature
(Aivazian etal., 2003) and suggest that firm characteristics strongly influence dividend policy in
China as in other emerging economies. Dividend paying firms have stronger shareholder protection (measured by lower management corruption and higher property rights protection), higher
government shareholding, and operate in provinces characterized by higher institutional investor
presence.
10
Table 1. Sample characteristics.

Panel A categorizes the sample by the form of the dividend: Non-payers (firms that do not pay any type of
dividend); Cash Payers (firms that pay only cash dividends); and Stock Payers (firms that pay stock or stock
plus cash dividends). For the sub-samples of Cash Payers and Stock Payers, Panel B reports the relative
change in the dividend between the current and subsequent dividend payment (increase, decrease, no
change). Panel C reports the mean announcement return (MCAR). MCAR is the market-adjusted cumulative
abnormal return from t = 5 to t = 10, where t = 0 is the announcement date of proposed dividend
distribution. Initiate denotes the sub-sample of firms initiating a dividend in the subsequent period. Changeto
denotes the sub-sample of firms that switched from cash (stock) dividends to stock (cash) dividends in the
subsequent period; Continue denotes the sub-sample of firms that paid the same type of dividends in both
periods.
Panel A: Sample break-down based on dividend type
Non-payers
Cash Payers
Stock Payers
Total
2513
2365
275
5153
Panel B: Dividend changes (Divt+1 Divt) by dividend type
Increase
Decrease
No Change
Cash dividend payers

Stock dividend payers
- Stock component
- Cash component
26.28%
52.67%
4.59%
23.97%
87.24%
58.16%
21.05%
8.16%
17.86%
Panel C: Mean market-adjusted MCARs (%)

Stock Dividends
Dividend changes (Divt+1 Divt)

Increase
- Initiate
- Changeto
- Continue
Cash Dividends
- Initiate
- Changeto
- Continue
Decrease
7.56
3.43
3.65
7.56
2.03
2.13
0.06
0.31
1.09
0.43
No Change
0.93
Relative to cash dividends, firms paying stock dividends are older, growing, more profitable,
have more retained earnings and higher private ownership prior to listing, and invest more in fixed
assets. The number of years between a firms first seasoned equity offering and its IPO (SEOAGE)
is 3.26 years for stock dividend payers and 3.31 years for cash dividend payers, and the difference
is not significant either economically or statistically.
To investigate whether our selected firm characteristic variables are likely to be subject to multicollinearity problems in our later regression analysis, we examine the correlations between the
independent variables that are used in our analysis and report the results in Table 3. We find that
these variables are generally not highly correlated with each other. The exception is the correlation
between profitability (ROA) and retained earnings per share (REPS), non-tradable (NT/TS) and
government shareholdings (GV/TS), private ownership prior to listing (Private) and government
shareholdings (GV/TS), provincial institutional share holdings (InstHoldings) and provincial
DPS
Dividend payout
Split
TA
ROA
DE
Cash/TA
FA growth
NT/TS
Variable
0.00
0.00
1821.86
0.00
1.05
0.21
0.12
0.56
2503.68
0.02
0.79
0.23
0.16
0.58
Nonpayers
(2)
0.07
40.13
Whole
sample
(1)
3152.70
0.05
0.55
0.25
0.20
0.59
0.13
74.14
Payers
(3)
3.97
1466.75
1.42
3089.74
0.06
0.65
0.24
0.26
0.55
Stock
dividend
payers
(4)
3160.03
0.05
0.53
0.25
0.19
0.59
0.14
80.16
Cash
dividend
payers
(5)
15.93***
38.95***
7.53***
10.76***
9.37***
6.59***
62.87***
6.23***
t-statistics on
the difference
between (2)
(3)
15.28***
37.84***
7.71***
10.63***
8.33***
7.80***
61.95***
6.01***
t-statistics on
the difference
between (2)
(4)
5.86***
23.53***
5.30***
3.92***
6.43***
1.85*
17.49***
14.87***
t-statistics on
the difference
between (2)
(5)
(Continued)
16.91***
13.95***
0.31
4.84***
3.31***
0.94
2.95***
4.91***
t-statistics on
the difference
between (4)
(5)
Table 2. Summary statistics.

This table presents mean values for each firm variable. DPS is dividend (measured in yuan) per share. For stock dividend payers, DPS is calculated as the
sum of cash dividend per share and cash equivalent stock dividend per share. The cash equivalent stock dividend per share is computed as P * (n/(1+n)),
where P is share price and n is number of stock dividend per share; Dividend payout is dividend per share over earnings per share; Split is a ratio of the
number of outstanding shares after the stock dividend over the number of shares before the stock dividend; TA is the total assets; ROA is return on total
asset and is expressed in percentage; DE is debt to equity ratio; Cash/TA = (cash + cash equivalent + short-term investment)/TA; FA growth rate is the annual
growth rate of gross fixed assets; NT/TS is number of non-tradable shares (NT) relative to total number of shares outstanding (TS); GV/TS is number of
government shares (GV) relative to total number of shares outstanding (TS); CSC/TA is total amount of cash spent on construction relative to total assets;
Age is the number of days since the first day of listing, expressed in years; REPS is the retained earnings per share, used to measure a firms ability to pay
stock dividends; ETC measures the total entertainment and travel costs of the firms in each province and is standardized by total sales of the firms (Cai
etal., 2011), which measures management corruption for each province in China. Each firm in the sample is assigned a corresponding provincial ETC value
based on the location of the firms main operations; PP denotes property rights protection at provincial level (Cai etal., 2011), which measures provincial
government protection of property rights in China. Each firm in the sample is assigned a corresponding provincial PP value based on the location of the
firms main operations; InstHolding is provincial institutional share holdings. Each firm in the sample is assigned a corresponding provincial value according to
the location of the firms main operations; SEOAGE is number of years between a firms first seasoned equity offering and its IPO, expressed in years; % of
Private is the percentage of firms that are privately owned before they went public; % of Cross-list is the percentage of firms that have their shares crosslisted in more than one stock exchange. With respect to dividends, non-payers are firms that do not pay any dividends in the current period, while payers
are firms that pay dividends in the current year. Payers are further classified into cash dividend payers (that pay cash dividends only) and stock dividend
payers (that pay stock or both stock and cash dividends). The sample period is from 2003 to 2007. ***, **, and * denote statistical significance at 1%, 5%,
and 10% levels, respectively.
He et al.
11
Nonpayers
(2)
0.32
0.05
7.15
0.06
0.01
0.59
2.28
0.05
38.00
8.60
2513
Whole
sample
(1)
0.35
0.06
6.39
0.23
0.01
0.60
3.05
0.06
30.29
8.67
5153
Variable
GV/TS
CSC/TA
Age
REPS
ETC
PP
SEOAGE
InstHolding
% of Private
% of Cross-list
# of Obs
Table 2. (Continued)
0.38
0.08
5.68
0.51
0.01
0.61
3.30
0.07
22.95
8.75
2640
Payers
(3)
0.31
0.09
6.34
0.68
0.01
0.59
3.26
0.06
34.18
5.82
275
Stock
dividend
payers
(4)
0.39
0.08
5.60
0.49
0.01
0.61
3.31
0.07
21.65
9.09
2365
Cash
dividend
payers
(5)
9.16***
19.54***
16.19***
35.12***
8.42***
3.85***
7.12***
6.17***
t-statistics on
the difference
between (2)
(3)
10.06***
18.36***
16.55***
33.64***
8.35***
4.28***
7.17***
5.98***
t-statistics on
the difference
between (2)
(4)
0.26
9.09***
3.60***
23.92***
3.51***
0.54
2.25***
2.67***
t-statistics on
the difference
between (2)
(5)
4.52***
2.53**
3.24***
6.46***
0.83
2.58**
0.81
0.52
t-statistics on
the difference
between (4)
(5)
12
13
He et al.
property rights protection (PP), and number of years since IPO (Age) and number of years between
a firms first seasoned equity offering and its IPO (SEOAGE).
5.2. Factors affecting dividend payment and types of dividend

We use a logistic regression to model the dividend choice as a function of firm characteristics. In
addition to the institutional and firm variables described in Sections 2 and 3, we include a crosslisting dummy variable that takes a value of one if the firm has cross-listed shares in either B-share
markets in China or other overseas markets. To control for stock market conditions and industry
effects, all regressions include a bull-market dummy variable that takes the value of one if the
announcement date of a proposed dividend plan falls into a bull market, where the classification of
bull and bear markets follows Yan etal. (2007), and industry dummy variables for finance, utilities,
properties, conglomerate, and industrial industries.
As a consequence of multicollinearity, we cannot include all the variables in a single regression.
Rather, we estimate a separate regression including government ownership (GV/TS), institutional
shareholdings (InstHolding), and the number of years passed since the IPO and before the first
SEO (SEOAGE).
Consistent with our expectations, the results in Columns 1 and 2 of Table 4 show that younger,
larger, and more profitable firms are more likely to pay dividends. Further, these firms tend to have
lower leverage, higher cash holding and retained earnings, and spend more cash on construction.
However, asset growth is only weakly positively related to the likelihood of paying dividends.
Contrary to the findings in the USA and other markets that mature firms are more likely to pay dividends, the negative coefficient on age combined with the positive coefficient on FA growth rate
and on SEOAGE indicates that young and growing firms establish a dividend payment history to
conform to the CSRCs requirement for external equity financing.
We find that corporate governance, shareholder protection, and institutional monitoring influence the likelihood of paying dividends. Consistent with our expectations, firms with lower management corruption and higher property rights protection are more likely to pay dividends, in
particular cash dividends. Higher provincial institutional shareholdings are associated with a higher
likelihood of paying a dividend, both stock and cash. The cross-listing dummy variable, however,
does not appear to influence the likelihood of paying dividends.
Consistent with the earlier results of Wei etal. (2003), we find that although firms that were
privately owned prior to listing are less likely to pay a dividend, they are more likely to pay a stock
dividend if they choose to pay dividends. Firms with higher levels of non-tradable shares are more
likely to pay cash dividends. This result is consistent with our argument that firms cater to the
demands of non-tradable shareholders in setting their dividend policy.
With particular reference to the choice to pay stock dividends, the results in Columns 3 and 4
show that larger firms that are more profitable have higher levels of retained earnings and higher
growth, and invest more in fixed assets, are more likely to choose to pay a stock dividend rather
than forgoing a dividend. In addition, compared with cash payers, stock payers are smaller and
make more use of debt financing (see Columns 7 and 8 of Table 4). These results are consistent
with the argument that higher growth firms, with higher retained earnings and greater investment
in fixed assets, tend to substitute stock dividends for cash dividends to meet the dividend history
requirement for external financing while allowing for the retention of internal funds for ongoing
investment. However, contrary to expectations, we find that the likelihood of paying a stock dividend is only weakly influenced by subsequent equity capital raisings. Further, to the extent that
these high-growth firms are characterized as high information asymmetry, these results are consistent with the argument that these firms use stock dividends to attract the attention of analysts
(Almazan etal., 2008; Grinblatt etal., 1984).
Log (TA)
ROA
DE
Cash/TA
FA growth rate
NT/TS
GV/TS
CSC/TA
Log(Age)
REPS
Private
ETC
PP
Cross-list
# of new offers
InstHolding
Log(SEOAGE)
Split
MCAR
1.00
0.19 1.00
0.00 0.18
0.08 0.18
0.13 0.08
0.11 0.06
0.20 0.08
0.13 0.25
0.16 0.14
0.34 0.52
0.27 0.09
0.06 0.11
0.05 0.02
0.23 0.02
0.15 0.20
0.09 0.05
0.02 0.11
0.05 0.14
0.08 0.08
1.00
0.09
0.01
0.04
0.05
0.03
0.09
0.21
0.08
0.01
0.00
0.00
0.01
0.04
0.00
0.01
0.02
Log ROA DE
(TA)
1.00
0.08 1.00
0.02 0.01
0.00 0.01
0.15 0.18
0.13 0.12
0.10 0.17
0.00 0.01
0.07 0.00
0.05 0.01
0.02 0.04
0.09 0.10
0.18 0.00
0.06 0.08
0.03 0.06
0.01 0.01
1.00
0.38
0.04
0.31
0.01
0.07
0.02
0.03
0.17
0.01
0.05
0.10
0.01
0.11
1.00
0.03 1.00
0.13 0.26
0.08 0.25
0.55 0.06
0.00 0.06
0.08 0.04
0.01 0.04
0.02 0.16
0.06 0.02
0.06 0.11
0.02 0.08
0.02 0.00
1.00
0.19 1.00
0.04 0.12
0.01 0.08
0.10 0.05
0.19 0.07
0.08 0.19
0.07 0.02
0.34 0.11
0.03 0.14
0.09 0.06
1.00
0.04
0.10
0.08
0.00
0.11
0.00
0.01
0.04
1.00
0.40
0.07
0.02
0.15
0.03
0.01
0.00
1.00
0.01
0.30
0.06
0.05
Cross- # of
list
new
offers
1.00
0.12 1.00
0.03 0.00
0.39 0.12
0.03 0.15
0.01 0.01
0.00 0.01
Cash/ FA
NT/TSGV/ CSC/ Log REPS Private ETC PP
TA growth
TS
TA (Age)
rate
1.00
0.05
0.02
0.02
1.00
0.02
0.00
1.00
0.09 1.00
InstHolding Log
Split MCAR
(SEOAGE)
Table 3. Correlation matrix of variables.

This table presents Pearson correlation of coefficients among the explanatory variables. Private is a dummy variable and equals one if a firm is not a stateowned firm prior to listing and zero otherwise; Cross-list is a dummy variable and equals one if a firm has cross-listed shares in either B-share markets in
China or other overseas markets and zero otherwise; # of new offers is the total number of successful new issues conducted within the next three years
after dividend announcement. MCAR is the market-adjusted cumulative abnormal return from t = 5 to t = 10, where t = 0 is the announcement date of the
proposed dividend distribution. All other variables are as defined in Tables 1 and 2.
14
35.58
(213.21)***
0.36
(14.84)***
1.00
(5.95)**
0.34
(3.50)*
37.27
(390.01)***
0.38
(25.50)***
1.26
(17.49)***
0.23
(3.02)*
0.88
(7.94)***
2.60
(15.00)***
11.95
(55.06)***
0.50
(43.83)***
13.15
(108.44)***
0.62
(115.40)***
Intercept
Log (TA)
ROA
DE
Cash/TA
FA growth rate
NT/TS
GV/TS
CSC/TA
0.71
(10.46)***
3.42
(14.73)***
(2)
(1)
Payers vs. Non-Payers
4.35
(14.94)***
0.02
(0.17)
0.59
(0.91)
0.63
(6.95)***
1.57
(7.10)***
31.24
(136.07)***
9.70
(16.47)***
0.38
(12.05)***
(3)
4.42
(11.74)***
0.02
(0.17)
0.48
(0.48)
0.58
(4.13)**
2.13
(10.63)***
32.12
(116.57)***
10.12
(15.46)***
0.38
(10.20)***
(4)
Stock vs. Non-Payers
2.40
(11.96)***
0.45
(33.20)***
1.24
(16.34)***
0.16
(1.36)
1.26
(14.85)***
36.03
(354.69)***
13.98
(115.64)***
0.65
(120.33)***
(5)
0.86
(14.79)***
3.33
(13.51)***
0.44
(19.63)***
0.95
(5.22)**
0.30
(2.57)
34.10
(192.66)***
12.25
(54.87)***
0.52
(43.94)***
(6)
Cash vs. Non-Payers
1.88
(3.62)*
0.74
(28.39)***
0.31
(0.31)
0.50
(6.53)**
2.60
(22.13)***
12.76
(30.12)***
4.39
(3.94)**
0.31
(9.45)***
(7)
Stock vs. Cash
(Continued)
3.43
(2.11)
0.34
(9.23)***
13.63
(30.07)***
0.72
(22.42)***
0.31
(0.26)
0.42
(3.28)*
2.60
(18.90)***
2.36
(4.72)**
(8)
Table 4. Logistic regression on the likelihood of firms paying dividends.

The table reports the results of logistic regression on the likelihood of firms paying dividends. Columns 1 and 2 examine the likelihood of firms paying
dividends (i.e. any form of dividend payments) for the whole sample. The dependent variable equals one for dividend paying firms and zero otherwise.
Columns 3 and 4 examine the likelihood of firms paying stock dividends using the sub-sample of stock-dividend-paying firms and non-payers. The dependent
variable equals one for stock-dividend-paying firms and zero otherwise. Columns 5 and 6 estimate the likelihood of firms paying cash dividends using the
sub-sample of cash-dividend-paying firms and firms paying no dividend (non-payers). The dependent variable equals one for cash-dividend-paying firms and
zero otherwise. Columns 7 and 8 examine the likelihood of firms paying stock dividends using the sample of dividend payers. The dependent variable equals
one for stock-dividend-paying firms and zero for cash-dividend-paying firms. All other variables are as defined in Tables 13. All regressions include dummy
variables for bull markets (the classification of bull and bear markets follows Yan etal. (2007) and industries (finance, utilities, properties, conglomerate, and
industrial). Figures in parenthesis are Wald chi-squares. ***, ** and * denote significance at the 1%, 5% and 10% levels, respectively.
He et al.
15
0.76
(90.93)***
1.04
(100.01)***
0.61
(47.87)***
17.52
(5.02)**
0.83
(8.94)***
Log(Age)
REPS
Private
ETC
PP
Cross-list
# of new offers
InstHolding
Private*GV/TS
Log(SEOAGE)
0.01
(0.01)
0.14
(3.15)*
(1)
1.24
(3.93)**
0.96
(3.35)*
0.29
(9.25)***
0.02
(0.01)
29.86
(9.35)***
1.02
(62.63)***
(2)
0.43
(1.36)
0.01
(0.01)
0.23
(1.94)
1.15
(43.32)***
0.01
(0.00)
24.71
(2.24)
0.79
(1.80)
(3)
0.31
(0.64)
0.04
(0.05)
2.42
(6.77)***
0.27
(2.13)
1.12
(34.74)***
0.03
(0.03)
15.90
(0.86)
(4)
Stock vs. Non-Payers
0.12
(0.58)
0.15
(3.18)*
0.83
(103.05)***
0.95
(80.98)***
0.68
(55.03)***
16.10
(4.05)**
1.05
(13.43)***
(5)
1.11
(3.19)*
0.90
(2.89)*
0.32
(10.33)***
0.07
(0.08)
30.67
(9.46)***
0.93
(51.19)***
(6)
Cash vs. Non-Payers
0.64
(4.56)**
0.21
(3.06)*
0.36
(7.58)***
0.81
(23.67)***
0.59
(14.56)***
8.15
(0.30)
1.70
(10.64)***
(7)
Stock vs. Cash
0.45
(9.72)***
0.66
(13.56)***
0.59
(11.93)***
12.86
(0.77)
0.46
(2.02)
0.19
(2.15)
0.76
(0.98)
(8)
16
17
He et al.
Finally, the choice of a stock dividend rather than a cash dividend is less likely for firms with a
high proportion of non-tradable shares and state ownership prior to listing and for firms operating
in regions with high protection of property rights, that is, high shareholder protection.
5.3. Announcement effect

With respect to the influence of firm characteristics on the market reaction to the announcement
of the form and level of the dividend payment, Table 5 reports the cross-sectional analysis of
dividend announcement returns, measured as the market-adjusted cumulative abnormal return
from t = 5 to t = 10 days, where t = 0 is the announcement day of the proposed PDS. Columns
1 and 2 of Table 5 report the difference in market reactions between dividend payers and nonpayers. A dummy variable, Payer, is included, and it takes a value of one if a firm pays any
form of dividend and zero otherwise. We also include DProfit as a control for the confounding
effect of earnings announcements. DProfit is a dummy variable that takes a value of one if the
change in a firms distributable profit is positive and zero otherwise. As shown in Columns 1
and 2, the overall market reaction to the dividend scheme is indifferent to whether the firm is a
payer or non-payer, given the insignificance of the dummy variable, Payer. This result is not
surprising given the relatively small sample of stock dividend payers and the similarity observed
in market reactions to the announcement of cash dividends and non-payers (see Figure 1). In
addition, we find no association between debt/equity ratio, growth, cash holding, fixed assets
investment, and the market reaction to the dividend scheme announcement. However, we find
that the larger the firm, the higher the ROA, and the stronger the market reaction around the
announcement.
Columns 3 and 4 investigate the market reactions to the payment of a dividend for the subsample of payers, which pay either cash or stock dividend. We find that the larger the firm, the
lower the debt/equity ratio, the stronger the market reaction to the announcement of a dividend
payment. In addition, the higher the proportion of non-tradable shares, the smaller the market reaction to the announcement of a dividend payment. Consistent with the argument that the payment of
a dividend signals the firms financing choice, we find that the market reaction to the dividend
announcement is positively related to subsequent equity capital raisings. In addition, we find no
association between profitability (ROA) and the market reaction to the announcement of a dividend payment.
We compare the difference in market reactions between stock and cash dividends by including
a dummy variable, Stock, which takes a value of one if a firm pays only a stock dividend and zero
for cash dividends (Column 4). We find that the coefficient on Stock is consistently positive and
significant at the 1% level, suggesting the announcement effect for stock dividends is significantly
greater than that for cash dividends.
Columns 57 of Table 5 show the market reaction to the announcement of a cash dividend. We
find that the higher the proportion of non-tradable shares, the smaller the market reaction to the
announcement of a dividend payment. This is consistent with firms paying cash dividends as a way
to compensate and cater to the demands of non-tradable shareholders, where this action by management is not seen as in the interest of public investors.
We compare the difference in market reactions to cash dividend payers that initiate a cash dividend, continue to pay a cash dividend, or change to a cash dividend, respectively. Three dummy
variables are included in separate regressions: Continue takes a value of one for firms continuing
to pay a cash dividend from last period and zero otherwise; Initiate equals one for newly initiated
cash dividend payers (i.e. no dividend was paid in the last period) and zero otherwise; and
Changetocash equals one for payers that switch from stock dividends in the last period to cash
t-stat
3.98***
5.83***
2.62***
3.66***
1.52
0.45
1.19
5.18***
0.59
2.39**
1.42
1.59
0.77
0.63
2.73***
(1)
Coeff
20.38
7.94
0.58
14.71
0.11
0.56
0.63
6.96
1.62
0.79
0.46
0.59
25.20
0.76
1.67
Intercept
Split
Log (TA)
ROA
DE
Cash/TA
FA growth rate
NT/TS
GV/TS
CSC/TA
Log(Age)
REPS
Private
ETC
PP
Cross-list
Payers vs. Non-payers
2.89***
3.85***
1.84*
2.18**
0.86
1.13
0.33
1.28
0.79
0.46
0.71
0.49
1.31
3.16
0.21
32.14
0.46
t-stat
20.43
7.28
0.59
13.30
0.07
2.10
0.28
Coeff
(2)
0.95
1.00
2.02
0.19
41.65
1.22
1.77
30.01
8.60
0.96
6.13
0.88
0.60
0.54
4.73
Coeff
(3)
0.31
2.83***
3.67***
0.39
0.97
0.84
2.29**
4.84***
7.03***
3.46***
0.79
1.91*
0.38
0.92
2.76***
t-stat
Stock vs. Cash Dividend Payers
1.98
0.87
0.75
1.78
0.30
27.18
0.92
2.32
1.07
1.99
0.97
4.90
14.91
Coeff
(4)
2.14**
2.75***
0.25
1.97**
1.05
1.33
2.44**
0.23
1.74*
2.77***
0.50
0.58
2.12**
t-stat
Table 5. Dividend Announcement Returns.

This table reports cross-sectional regression on market reaction to the dividend announcement. The dependent variable is market-adjusted cumulative
abnormal return (MCAR) from t=5 to t=10, where t=0 is the announcement date of the proposed profit distribution scheme. Columns 1 and 2 report
the MCAR regressions for the whole sample, Payer is a dummy variable and equals one for dividend-paying firms and zero otherwise; DProfit is a dummy
variable and equals one if the change in a firms distributable profit is positive and zero otherwise. Columns 3 and 4 report the MCAR regressions for the
sub-sample of dividend paying firms. Stock is a dummy variable and equals one for stock dividend payers and zero for cash dividend payers. Columns 5, 6 and
7 report market reaction to cash dividend initiation, continuation and change, respectively. Columns 8, 9 and 10 report market reaction to stock dividend
initiation, continuation and change. Continue is a dummy variable that equals one for continuing stock dividend payers from last period and zero otherwise;
Initiate equals one for firms that initiated stock dividend (i.e. no dividend was paid last period) and zero otherwise; Changetocash equals one for payers that
switch from stock dividends in the last period to cash dividends in this period and zero otherwise. Changetostock equals one for payers that switch from
cash dividends in the last period to stock dividends in this period and zero otherwise. All other variables are as defined in Tables 1 to 3. All regressions
include dummy variables for bull markets and industries (finance, utilities, properties, conglomerate, and industrial). T-statistics are based on Whites
Heteroskedasticity-robust standard errors. ***, ** and * denote statistical significance at the 1%, 5% and 10% level, respectively.
18
1.21
0.15
1.28
t-stat
t-stat
3.85***
3.71***
1.68*
1.70*
0.39
1.52
2.43**
0.23
2.20**
3.01***
0.09
(5)
Coeff.
25.85
1.14
14.34
0.88
0.67
1.10
4.63
0.80
0.90
1.86
0.05
Intercept
Log (TA)
ROA
DE
Cash/TA
FA growth rate
NT/TS
CSC/TA
Log(Age)
REPS
Private
3.98%
4.70
0.59
0.24
1.15
0.34
24.58
1.09
12.52
0.89
0.55
1.17
4.54
1.01
1.02
1.83
0.03
Coeff.
(6)
1.66*
0.26
0.54
2.23**
0.59
3.67***
3.56***
1.47
1.72*
0.32
1.61
2.38**
0.29
2.50**
2.96***
0.05
t-stat
6.80%
1.35
0.91
Coeff
Coeff
t-stat
(3)
3.07***
2.56**
t-stat
24.74
1.09
14.01
0.84
0.57
1.08
4.70
0.94
1.05
1.87
0.07
3.25
4.94%
1.64
6.10
0.81
Coeff
(4)
Coeff.
(7)

(2)
Cash Dividend Payers Only
6.55%
0.45
0.06
0.42
Coeff
# of new
offers
InstHolding
Private*GV/TS
Log(SEOAGE)
DProfit
Payer
Stock
Adj. R2
(1)
Payers vs. Non-payers
(Continued)
3.69***
3.55***
1.63
1.63
0.34
1.49
2.47**
0.27
2.60***
3.02***
0.12
t-stat
2.45**
3.15***
4.22***
2.00**
t-stat
He et al.
19
1.24
1.41
1.84*
2.91***
2.00**
t-stat
t-stat
0.36
4.78***
0.06
0.27
0.73
0.15
0.38
1.00
0.14
1.12
(8)
Coeff.
6.79
10.84
0.06
5.76
0.96
0.79
0.77
4.98
1.28
1.56
Intercept
Split
Log (TA)
ROA
DE
Cash/TA
FA growth rate
NT/TS
CSC/TA
Log(Age)
Stock Dividend Payers Only
4.58%
58.36
2.22
1.52
1.13
1.33
Coeff.
ETC
PP
Cross-list
# of new offers
Initiate
Continue
Changetocash
Adj. R2
(5)
Cash Dividend Payers Only
2.81
10.83
0.24
4.02
0.66
0.34
0.69
5.48
1.53
1.93
Coeff.
(9)
0.15
4.69***
0.27
0.19
0.49
0.06
0.33
1.08
0.17
1.40
t-stat
0.84
0.41
4.44%
1.28
1.47
1.86*
2.97***
60.27
2.31
1.54
1.16
2.05
11.24
0.27
0.45
0.96
0.94
0.40
4.26
2.57
1.88
Coeff.
(10)
4.43%
0.49
57.72
2.28
1.62
1.14
Coeff.
Coeff.
t-stat
(7)
(6)
0.11
4.91***
0.31
0.02
0.73
0.18
0.19
0.85
0.29
1.36
t-stat
1.23
1.45
1.95*
2.94***
0.80
t-stat
20
0.65
0.89
1.30
1.37
1.86*
0.33
2.05**
Coeff.
1.04
1.36
200.29
7.34
5.56
0.37
3.60
REPS
Private
ETC
PP
Cross-list
# of new offers
Initiate
Continue
Changetostock
Adj. R2
8.46%
t-stat
(8)
Stock Dividend Payers Only
0.56
0.99
6.94%
0.73
1.01
1.02
1.45
1.96*
0.31
1.18
1.68
156.36
7.79
5.94
0.34
1.84
7.36%
1.04
1.48
173.94
7.59
5.31
0.40
1.67
Coeff.
Coeff.
t-stat
(10)
(9)
0.64
0.97
1.13
1.41
1.75*
0.35
1.18
1.34
t-stat
He et al.
21
22
Table 6. Descriptive statistics on analysts coverage.

This table reports the mean number of analysts following prior to and post the dividend announcement.
Analyst coverage is defined as the number of I/B/E/S analysts making one-year forecasts on the firm. The
data is obtained from IBES International for the period 20032007. All other variables are as defined in
Table 5. ***, ** and * denote statistical significance at the 1%, 5% and 10% levels, respectively.
Non-Payers
Cash Dividend Payers
Stock Dividend Payers

- Initiate
- Continue
Number of
observations
Mean analyst coverage

Prior to dividend
announcement
Post dividend
announcement
776
2.73
2.52
1430
1.95
2.16
175
26
38
1.49
0.40
2.00
2.15
1.35
2.87
t-statistic
(Post Prior)
0.66
1.56
2.22**
2.55**
1.15
dividends in the current period and zero otherwise. Consistent with the existing literature (Michaely
etal., 1995), the market response to the initiation of a cash dividend is strongly positive and significant. In contrast, the market response is insignificantly different from zero for firms continuing to
pay cash dividends or choosing to change from stock to cash dividends. This result is consistent
with our conjecture that the initiation of a cash dividend signals the firms financing choice to the
market, whereas the continuation of a dividend does not serve the same signaling role.
Similarly, Columns 810 of Table 5 investigate the differences in market reactions to stock dividend payers that initiate a stock dividend, continue to pay a stock dividend, or change to a stock
dividend. The market response to the initiation of a stock dividend is strongly positive and significant. In contrast, the market response is insignificantly different from zero for firms continuing to
pay stock dividends or choosing to change from cash to stock dividends.
This result is consistent with the firm using the initiation of a stock dividend to differentiate
itself in a market characterized by opaque information disclosure (see Bai etal., 2004; Lin etal.,
1998), whereas the continuation of a dividend does not serve the same signaling role. Likewise,
this result is also consistent with the initiation of a stock dividend to signal the firms financing
choice to the market. In addition, the market response to dividend initiation is stronger for stock
dividends than for cash dividends.
In addition, consistent with management making use of stock dividends to keep the firms stock
price within its acceptable trading range, we find that the coefficient on the split factor is positive
and significantly different from zero in all regressions.
Finally, taken with the observation from Column 7 that the market response is insignificantly
different from zero for firms changing from stock to cash dividends, the result that the market
response is insignificantly different from zero for firms changing from cash to stock dividends is
consistent with the argument that following the initiation of a stock dividend firms consider stock
dividends as a substitute for cash dividends, and that switching between them has no signaling role.
Table 6 investigates the differences in analyst coverage prior to and post the dividend announcement.16 Analyst coverage is defined as the number of IBES analysts making one-year forecasts on
the firm. The data is obtained from I/B/E/S International for the period 20032007. The results
show that the mean analyst coverage increases after the announcement of a stock dividend from
23
He et al.
1.49 to 2.15, and the increase is statistically significant at the 5% level. Further, this increase is
statistically significant only after the initiation of a stock dividend. These results are consistent
with our argument that the initiation of a stock dividend allows management to disclose information allowing the market to verify the quality of the firms investments by analysts.
Overall, these results are consistent with stock dividends substituting for stock splits. The results
suggest that management choose to disclose information via stock dividends as a form of communication between firms and investors (Almazan etal., 2008) and use stock dividends to manage
liquidity.
5.4. Fixed effects and cross-sectional estimates

This section examines the extent to which the cross-sectional and time-series variations in our
explanatory variables drive our results. Up to this point, our emphasis has been on the crosssectional variation in the likelihood of paying dividends and announcement effects. However,
firms dividend payments can vary over time, and some of the variation may be explained by the
year-to-year changes in our explanatory variables. To estimate the extent to which our dividend
payment results are generated from the cross-section versus the time series, Table 7 reports the
result on year-fixed-effect regressions on both the likelihood of paying a dividend (Columns 1 and
2) and the choice between stock and cash dividends (Columns 3 and 4).
The regression estimates reported in Table 7 indicate that the relationships between dividend
policy and firm characteristics are significant in the time series, and are consistent with our earlier
estimates reported in Table 4.17
Likewise, to estimate the extent to which our announcement effect results reported in Table 5
are generated from the cross-section versus the time series we estimate both FamaMacBeth
(1973) and year-fixed-effect regressions. Specifically, we report FamaMacBeth (1973) and yearfixed-effect regressions for both the full sample and the dividend payers sub-sample in Table 8.
The regression estimates reported in Table 8 indicate that the relationships between dividend
announcement effects and firm characteristics are consistent with our earlier estimates (reported in
Table 5) in both the cross-section and time-series regression.
6. Conclusion
This paper examines why firms choose to pay stock dividends. Using a sample of Chinese firms
dividend announcements between 2003 and 2007, we find that both firm characteristics and institutional structures influence the propensity of paying dividends. In particular, we find that older
firms that are more profitable, have lower leverage, higher levels of retained earnings, and private
ownership prior to listing, invest more in fixed assets, and operate in regions with weaker corporate
governance and shareholder protection are more likely to pay stock dividends.
The announcement effect for stock dividends is significantly greater than that for cash dividends, and this effect is driven by the initiation of stock dividends. Further, for those firms initiating a stock dividend, the number of analysts following increases significantly after the dividend
announcement. In contrast, firms continuing to pay a stock dividend do not evidence an increase in
analyst coverage post the dividend announcement. These results are consistent with the argument
that firms use the initiation of stock dividends to differentiate itself in a market characterized by
opaque information disclosure, attracting the attention of analysts. In addition, we find evidence
consistent with management making use of stock dividends to manage the liquidity of the firms
stock price.
110.04***
117.35***
377.34***
25.79***
19.24***
2.98*
8.80***
14.94***
94.11***
96.18***
46.37***
4.70**
8.93***
0.08
2.65
2.61
0.79
1.03
0.60
17.01
0.84
0.05
0.13
61.06***
9.09***
1.01
29.58
1.19
0.97
0.30
3.59*
3.40*
9.45***
0.03
9.21***
12.97***
0.67
3.24
0.04
60.35***
45.30***
204.98***
14.87***
6.62**
3.74*
12.97
0.52
35.05
0.36
1.06
0.36
1.58
0.40
0.93
0.59
7.65
1.63
0.73
0.18
4.72
0.32
13.74
0.80
0.13
0.48
2.90
2.48
9.11***
30.19***
14.29***
0.26
9.47***
5.81**
2.10
4.38**
9.68***
33.56***
32.17***
0.06
5.66**
25.15***
Wald
ChiSq
13.33
0.63
36.91
0.38
1.33
0.23
0.96
Coeff.
Intercept
Log (TA)
ROA
DE
Cash/TA
FA growth rate
NT/TS
GV/TS
CSC/TA
Log(Age)
REPS
Private
ETC
PP
Cross-list
# of new offers
InstHolding
Private*GV/TS
Log(SEOAGE)
Wald
ChiSq
Wald
ChiSq
Coeff.
Coeff.
(3)
(1)
(2)
0.57
0.17
0.81
2.03
0.50
0.78
0.61
13.11
3.85
0.36
14.69
0.79
0.08
0.40
2.95
Coeff.
(4)
2.49
9.59***
33.50***
25.77***
0.02
2.86*
21.94***
3.36*
11.37***
18.34***
12.70***
0.78
2.93*
1.64
1.07
Wald
ChiSq
Table 7. Logistic regression on the likelihood of firms paying dividends with year-fixed effect.
This table reports the logistic regression on the likelihood of firms paying dividends with year-fixed effect. Columns 1 and 2 report the likelihood of firms
paying dividends using the whole sample. The dependent variable equals one for dividend-paying firms and zero for firms paying no dividend. Columns 3 and 4
investigate the likelihood of firms paying stock dividends using the sub-sample of dividend payers. The dependent variable equals one for stock-dividend-paying
firms and zero for cash-dividend-paying firms. All other variables are as defined in Tables 14. All regressions include dummy variables for years, bull markets,
and industries (finance, utilities, properties, conglomerate, and industrial). ***, ** and * denote statistical significance at the 1%, 5% and 10% levels, respectively.
24
0.91
0.84
0.50
1.44
0.26
2.20
0.41
2.27
0.04
40.72
0.10
2.81
0.54
2.64**
1.09
1.89
1.41
1.37
2.32*
3.80**
0.73
0.68
0.23
0.47
27.45
0.67
1.17
0.91
0.35
0.81
0.45
0.62
30.47
0.72
1.25
0.81
21.96
7.85
0.50
12.79
0.13
1.08
0.34
2.51
3.28**
14.85***
2.35*
0.68
3.24**
1.01
0.93
3.94**
22.36
8.73
0.62
5.96
0.24
1.08
0.45
2.24
Intercept
Split
Log (TA)
ROA
DE
Cash/TA
FA growth rate
NT/TS
GV/TS
CSC/TA
Log(Age)
REPS
Private
ETC
PP
Cross-list
# of new offers
InstHolding
1.70
22.93***
1.10
0.07
5.04**
1.60
1.58
Coeff.
Coeff.
t-stat
Coeff.
11.18
7.87
0.25
0.89
0.34
1.97
0.46
(3)
(2)
(1)
t-stat
Year-fixed effect
FamaMacBeth
Panel A: Payers vs. Non-Payers, whole sample
0.13
2.49**
1.41
1.69*
0.95
0.61
2.08**
2.48**
4.36***
5.86***
2.31 **
3.22***
1.76*
0.88
0.65
1.85*
t-stat
3.81
0.04
41.02
0.18
0.14
0.15
5.74
7.09
0.23
11.88
0.09
2.14
0.42
Coeff.
(4)
(Continued)
0.80
3.82***
0.72
1.98**
1.10
1.18
0.51
0.14
0.04
0.41
0.93
0.05
1.38
t-stat
Table 8. FamaMacBeth and year-fixed effect regression on the dividend announcement returns.
This table reports the results of FamaMacBeth and year-fixed effect regression on the dividend announcement returns. The dependent variable is marketadjusted cumulative abnormal return (MCAR) from t = 5 to t = 10, where t = 0 is the announcement date of the proposed profit distribution scheme.
Panel A reports the MCAR regressions for the whole sample using the FamaMacBeth (1973) two-stage approach (Columns 1 and 2) and the year-fixed
effect model (Columns 3 and 4). Panel B reports the MCAR regressions for the payers sub-sample. The results based on the FamaMacBeth two-stage
approach are reported in Columns 5 and 6, whereas the year-fixed effect results are reported in Columns 7 and 8. Payer is a dummy variable and equals
one for dividend-paying firms and zero otherwise; Stock is a dummy variable and equals one for stock dividend payers and zero for cash dividend payers.
All other variables are as defined in Tables 13 and 5. All regressions include dummy variables for bull markets and industries (finance, utilities, properties,
conglomerate, and industrial). ***, ** and * denote statistical significance at the 1%, 5% and 10% levels, respectively.
He et al.
25
0.32
0.05
5.90%
2.35**
0.12
6.80***
16.62***
4.82***
0.46
2.55*
1.09
1.10
1.96
0.13
2.74*
3.17**
2.08
2.86*
0.04
2.22
2.37*
2.11
0.52
0.97
1.38
2.34
11.27
0.71
0.68
0.74
2.40
0.85
0.35
1.82
0.59
1.81
30.08
8.71
0.85
5.50
0.91
0.90
0.43
1.33
0.47
1.02
2.32
0.53
0.34
4.87***
7.15***
3.10***
0.71
1.99*
0.58
0.73
0.76
0.15
2.90***
4.18***
t-stat
28.49
9.12
0.81
6.04
0.66
1.24
0.68
0.67
0.21
0.86
1.89
Coeff.
Intercept
Split
Log (TA)
ROA
DE
Cash/TA
FA growth rate
NT/TS
CSC/TA
Log(Age)
REPS
t-stat
Coeff.
Coeff.
(7)
(5)
t-stat
Year-fixed effect
0.21
0.13
10.02%
t-stat
FamaMacBeth
(6)
0.88
1.47
7.56***
0.08
1.00
0.29
0.68
0.02
3.00%
Coeff.
Panel B: Stock Dividend Payers vs. Cash Dividend Payers
Private*GV/TS
Log(SEOAGE)
DProfit
Payer
Adj. R2
t-stat
Coeff.
Coeff.
t-stat
(3)
(1)
(2)
Year-fixed effect
FamaMacBeth
Panel A: Payers vs. Non-Payers, whole sample
0.79
2.78
1.10
2.31
0.85
0.91
2.53
0.75
2.11
8.99
Coeff.
(8)
1.83
0.39
0.51
0.12
8.27%
Coeff.
(4)
1.28
2.39**
0.30
2.03**
1.23
1.18
0.44
0.69
1.76*
3.30***
t-stat
0.81
0.91
1.01
0.22
t-stat
26
Private
ETC
PP
Cross-list
# of new offers
InstHolding
DProfit
Stock
Adj. R2
3.84**
0.93
8.20%
0.72
2.07*
1.53
2.06
2.76*
0.12
55.19
1.39
1.21
1.16
t-stat
1.18
1.08
1.98
1.59
2.13
4.90**
8.93***
0.21
35.59
1.43
1.04
4.95
1.28
3.17
5.71%
Coeff.
9.84%
0.92
0.19
47.82
1.12
1.25
1.20
Coeff.
1.94*
0.39
1.12
0.78
1.61
3.38***
t-stat
Coeff.
t-stat
(7)
(5)
(6)
Year-fixed effect
FamaMacBeth
Panel B: Stock Dividend Payers vs. Cash Dividend Payers
1.37
1.16
6.10
1.28
3.28
7.27%
0.28
35.48
Coeff.
(8)
0.48
0.76
1.48
2.86***
2.48**
2.46**
4.28***
t-stat
He et al.
27
28
Overall, these results are consistent with stock dividends substituting for stock splits where
management choose to disclose information via the initiation of stock dividends as a form of communication between firms and investors (Almazan etal., 2008), while allowing for the retention of
internal funds for ongoing investments.
Acknowledgements
This paper has benefited from the useful comments and suggestions provided by Joseph Fan, Doug Foster, Jay
Hartzell, Phong Ngo, Rik Sen, Tom Smith, Vivian Tai, Dogan Tirtiroglu, Sheridan Titman, Takeshi Yamada,
participants at the 2009 Journal of Corporate Finance Special Conference on Emerging Markets, the 2011
Asian Finance Association Conference, the 2011 China International Finance Conference, and seminar participants at the University of Adelaide, Australian National University, and University of Melbourne. We are
also appreciative of the research assistance provided by Elizabeth Zhu, Meifen Qian, and Bin Yu. An earlier
version of this paper was titled Stock versus cash: signaling or catering.
Funding
This research received no specific grant from any funding agency in the public, commercial, or not-for-profit
sectors.
Notes
1. A growing literature in both developed and emerging markets has sought to determine the link between
firm characteristics, institutional structures, and dividend policy (Aivazian etal., 2003; Glen etal., 1995;
La Porta etal., 2000; Mitton, 2004). Examples of empirical studies within specific countries include
Kao and Chen (2013) using Taiwanese data and He (2012) utilizing a Japanese sample to investigate
the relationship between product market competition and dividend policies. They both find that firms in
more competitive industries pay more dividends and are more likely to increase dividends. By considering the institutional differences between tradable and non-tradable shares in China, Cheng etal. (2009)
highlight that Chinese retail investors favor the stock dividend and that the cash dividend is preferred by
non-tradable shareholders. In the context of the Australian market, Coulton and Ruddock (2011) find that
dividend paying firms are larger, more profitable, and have less growth options than non-dividend paying
firms. How etal. (2011) study long-run IPO performance and observe that Australian firms that initiated
a dividend perform better than non-dividend payers.
2. Trading in non-tradable shares is limited to the purchases by state-owned (or controlled) institutions
through negotiation or auction and requires approval from the government. More specifically, the transfer
price is based on net asset value, not the market price (see Calomiris etal., 2010; Xiao, 2005). After Chinas
stock market reform was initiated in 2005 (where most firms completed their reforms by the end of 2007),
non-tradable shares in firms were gradually converted to tradable shares over the next three years.
3. Given the similarity in the market responses to the announcement of stock dividends and the combined
cash and stock dividends, they are categorized into one group as stock dividend payers for the remainder
of the paper.
4. At present, shareholders are levied a 20% tax for both cash and stock dividends received; a policy that
has remained unchanged since 1997. Please also note that capital gains in China are tax exempt.
5. Capital reserve funds consist of accumulated donations, the difference in capital conversion raised from
foreign currency transactions and, more importantly, premium on capital (i.e. the excess of the amount
contributed by investors over the amount of the registered capital), etc.
6. When the CRF comes from surplus reserve funds, the OSRF has to be used before the SRF. However,
the balance of the SRF cannot fall below 25% of registered capital. In practice, however, capitalization
of surplus reserve funds is rare in China. During our sample period, only one case of capitalization of
surplus reserve funds was observed.
7. Given the fact that Chinese investors are levied a 20% tax for both cash and stock dividends received
while capital gains are tax exempt, this suggests that investor choice between cash and stock dividends
is tax neutral.
29
He et al.
8. We recognize the use of this measure is confounded by the observation that the size of the split factor
may itself be a signal. McNichols and Dravid (1990) argue that managers use their private information
about the firm to set the split factor, and this allows investors to make inferences about the managers
private information from the observed split factor.
9. We use 20032007 as our sample period to avoid the confounding effects of this regulatory change.
10. We recognize the look-ahead bias introduced by our choice of the total number of successful new issues
conducted within three years after the dividend announcement to proxy for the firms external equity
financing and mitigate our conclusions accordingly.
11. This relationship holds for our sample period.
12. As a robustness check, we also examine our sample using individual firms institutional holdings and our
conclusions remain unchanged.
13. Note that Chinese companies generally report their proposed annual dividend payment (or non-payment)
information in their financial report from January to April in the following year. Thus, proposed dividend
distribution plans reported in the financial report of 2007, for example, are actually the dividend payment
for the financial year of 2006.
14. The sample starts in 2003 since detailed information on dividend announcements is not available prior
to 2003. As previously discussed, we end the sample in 2007 to avoid the confounding effects of the
regulatory changes associated with the form of the dividend history requirement that occurred in 2007.
15. For stock dividends, dividend per share is the sum of any cash dividend and the cash equivalent stock
dividend expressed on a per share basis. The cash equivalent stock dividend per share is computed as
P * (n / (1+n)), where P is share price and n is number of stock dividend per share.
16. As a result of limitation on the availability, analyst coverage is only available for 775 firms and equivalent to 2381 firm-year observations.
17. With the inclusion of year-fixed effects, the continued positive and significant coefficient for nontradable shares suggests that this result is not mechanistically driven by the split share structure reform
introduced in 2005.
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Why Do Firms Pay Stock Dividends, Is It Just Stock Split

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553858

AUM0010.1177/0312896214553858Australian Journal of ManagementHe et al.

Why do firms pay stock

Australian Journal of Management

College of Business Administration, Bowling Green State University, USA

Department of Finance, University of Melbourne, Australia

Downloaded from aum.sagepub.com at CMU Libraries - library.cmich.edu on November 2, 2015

Australian Journal of Management

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Australian Journal of Management

2. Institutional background: discussion and implications

2.2. Dividend declaration procedures

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2.3. Regulation of dividend policy and equity financing in China

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Australian Journal of Management

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3. Firm characteristics and dividend policy

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Australian Journal of Management

4. Data and sample selection

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5.1. Firm characteristics

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Australian Journal of Management

Table 1. Sample characteristics.

Panel B: Dividend changes (Divt+1 Divt) by dividend type

Cash dividend payers

Panel C: Mean market-adjusted MCARs (%)

Dividend changes (Divt+1 Divt)

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Table 2. Summary statistics.

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5.2. Factors affecting dividend payment and types of dividend

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Table 3. Correlation matrix of variables.

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Payers vs. Non-Payers

Stock vs. Non-Payers

Cash vs. Non-Payers

Stock vs. Cash

Table 4. Logistic regression on the likelihood of firms paying dividends.

Payers vs. Non-Payers

Stock vs. Non-Payers

Cash vs. Non-Payers

Stock vs. Cash

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5.3. Announcement effect

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Payers vs. Non-payers

Stock vs. Cash Dividend Payers

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Table 5. Dividend Announcement Returns.

Stock vs. Cash Dividend Payers

Cash Dividend Payers Only

Payers vs. Non-payers

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Stock Dividend Payers Only

Cash Dividend Payers Only

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Stock Dividend Payers Only