Do Overpaid Dividends Drive Stock Price Crash Risk? Evidence from China

Abstract

This study is motivated by the research gap concerning cash dividend payouts in China. To fill this gap, we explore the impact of overpaid dividends on future stock price crash risk. We use a dataset of 2,662 firms with 15,416 firm-year observations of China’s A-share listed firms for the period 2009–2018. The baseline empirical result indicates that overpaid dividends are positively related to the likelihood of future stock price crash risk. The results further suggest that high-quality corporate governance and financial analyst coverage can moderate the positive effect of overpaid dividends on the crash risk. These results are valid after use of the difference-in-difference test and instrumental variable approach. Further, continuous overpaid dividends and state-owned enterprises with overpaid dividends have a stronger impact on the crash risk, and overpaid dividends are significantly affected by their peer firms.

Keywords: Overpaid dividends, stock price crash risk, corporate governance, Analyst coverage, China