Dividends in China
28 Pages Posted: 1 Nov 2014
Date Written: October 31, 2014
Why do firms pay dividends? This is a question which has long interested researchers, particularly since the dividend irrelevance proposition of Miller and Modigliani (1961) because, even though their theory (which relies on several assumptions) suggests investors are indifferent between a dollar distributed and a dollar retained in the firm, companies do pay dividends and this seems to be important to investors.
Research suggests that dividend policies vary by country and by firm type but international studies generally exclude China, even though the country boasts the third largest stock market in the world by market capitalisation (Carpenter, Lu and Whitelaw, 2014). In this paper we examine why Chinese firms pay dividends. We firstly review current international evidence in order to develop predictions relating to the dividend decisions (and investor responses) of Chinese firms relative to firms from two comparator countries, the UK and the US. We then analyse large samples of firms from each of these countries in order to test our predictions, with some interesting and surprising results.
Keywords: dividend policy; dividend premium; China
JEL Classification: G35, K22
Suggested Citation: Suggested Citation