Investment in Hard Times: Unintended Effects of Mandatory Dividend Policy in State-Owned Business Group
48 Pages Posted: 7 Jun 2021
Date Written: May 31, 2021
This study examines capital allocation efficiency in the business group when parent firms experience adverse shocks of financial conditions. We exploit a quasi-experiment in China, the mandatory dividend of a state-owned business group in 2007, to conduct difference-in-differences estimation, and find that: (1) When parent central state-owned enterprises are mandatorily required to pay dividend to the governments (parent CSOEs), their group-affiliated listed central state-owned enterprises (listed CSOEs) substantially improve investment efficiency. (2) A plausible mechanism is that adverse cash shocks of parent CSOEs could facilitate the resource reallocation through related party transactions within a business group motivated by the listed CSOEs’ investment opportunity instead of the parent CSOEs’ tunneling behavior. (3) Our findings are more pronounced for firms with better external and internal governance. Overall, we provide the empirical evaluation of the economic consequences of mandatory dividend policy in terms of a firm’s investment efficiency within a state-owned business group.
Keywords: Mandatory dividend policy; Investment efficiency; Business group; Related party transactions; Corporate governance, China.
JEL Classification: G34, G31
Suggested Citation: Suggested Citation