Corporate Dividend Payout and Earnings Management: Evidence from Chinese Regulatory Changes

60 Pages Posted: 8 Feb 2015

See all articles by Edward Lee

Edward Lee

University of Manchester - Alliance Manchester Business School

Martin Walker

University of Manchester - Manchester Business School

Jessie Y. Zhu

University of Toronto - Rotman School of Management

Date Written: February 6, 2015

Abstract

This paper examines the market reaction to and earnings management choices around changes in the regulations requiring a higher minimum dividend payout in China. We exploit the unique Chinese setting that facilitates identification of the agency cost effect to shed new light on the determinants of dividend payout policy. First, we find that the market reaction is more positive for firms that paid less than the new required minimum payout than for those that paid more than the new required minimum. In addition, we show that low dividend payers exhibit a greater tendency to manage their earnings downwards to comply with the earnings-based threshold, and investors can “see through” such earnings management behaviors. Our findings support the view of DeAngelo, DeAngelo and Skinner (2009) that agency costs of free cash flow retention are an important part of the dividend payout story.

Keywords: dividend payout regulation; agency cost; event study; earnings management; Chinese stock market

Suggested Citation

Lee, Edward and Walker, Martin and Zhu, Jessie Y., Corporate Dividend Payout and Earnings Management: Evidence from Chinese Regulatory Changes (February 6, 2015). Available at SSRN: https://ssrn.com/abstract=2561717

Edward Lee

University of Manchester - Alliance Manchester Business School ( email )

Booth St. West (Crawford House)
Manchester, M15 6PB
United Kingdom

Martin Walker (Contact Author)

University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Jessie Y. Zhu

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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