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Why Do Firms Pay Stock Dividends: Is it Just a Stock Split?

48 Pages Posted: 31 Jan 2013  

Xi He

Australian National University, Research School of Finance, Actuarial Studies and Applied Statistics

Mingsheng Li

Bowling Green State University - College of Business Administration

Jing Shi

RMIT University - School of Economics, Finance and Marketing

Garry J. Twite

University of Melbourne - Department of Finance; University of Melbourne - Faculty of Business and Economics; Financial Research Network (FIRN)

Multiple version iconThere are 2 versions of this paper

Date Written: December 18, 2012

Abstract

This paper examines why firms choose to pay stock dividends. Using a sample of listed Chinese firms, we find that younger, more profitable firms, with lower leverage, high levels of retained earnings, private ownership prior to listing, investing more in fixed assets and operating 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, suggesting 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 making use of stock dividends to keep the firm’s stock price within its acceptable trading range.

Keywords: dividend policy, stock dividend, cash dividend, signaling, catering, China

JEL Classification: G32, G35

Suggested Citation

He, Xi and Li, Mingsheng and Shi, Jing and Twite, Garry J., Why Do Firms Pay Stock Dividends: Is it Just a Stock Split? (December 18, 2012). Available at SSRN: https://ssrn.com/abstract=2208943 or http://dx.doi.org/10.2139/ssrn.2208943

Xi He

Australian National University, Research School of Finance, Actuarial Studies and Applied Statistics ( email )

Canberra, Australian Capital Territory 2601
Australia

Mingsheng Li

Bowling Green State University - College of Business Administration ( email )

Bowling Green, OH 43403
United States

Jing Shi

RMIT University - School of Economics, Finance and Marketing ( email )

Building 80
445 Swanston Street
Melbourne VIC, Melbourne 3000
Australia

Garry J. Twite (Contact Author)

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia

University of Melbourne - Faculty of Business and Economics ( email )

Department of Finance
Melbourne, VIC 3010
Australia
+61 3 90356172 (Phone)

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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