This study assesses distorting effect of financial constraints on the inverse relationship between internal and external finance by examining impact of an exogenous financing shock (i.e. a regulation released in China in 2008) on dividend policies in a quasi-natural experimental setting. Our result shows that in the absence of the regulation, the inverse relationship holds. However, the relation is twisted by the 2008 regulation. Compared with unconstrained firms, financially constrained firms are more willing to pay dividends and are more restrained to reduce cash dividends after the regulation, despite the fact that their external financing capacities are further constrained.
This paper extends the literature reviews of Curcuru et al. (2009, Handbook of Financial Econometrics, Elsevier Science, Amsterdam), on the heterogeneity of background risk during investment into the following categories: income from labor and entrepreneurial firm, housing, wealth, health, professional knowledge and risk aversion attitude. Referring to the literature on asset allocation, the paper designs a survey and sets up a two-stage decision model to empirically test the relationship between households' risky assets demand and their heterogeneous background risks. Based on questionnaires administered to 770 Chinese households, the paper shows that a background risk substitution effect does not exist during households' market participation decisions and that their risky assets ratio mainly depends on subjective market expectations. Moreover, background factors are not properly considered; individuals with a higher income risk or older individuals exhibit a 563 higher proportion of risky assets. Furthermore, households do not consider the background factors regarding housing and subjective risk preference attitudes significantly. The paper further finds that the value-at-risk of representative household's wealth in the sample is underestimated by approximately 29% when the housing background factor is not included.
The thesis examines the dividend puzzle in the context of the Chinese capital market and further investigates the factors that significantly affect dividend policy in Chinese listed firms. In Chapter two, we examine the announcement effects of dividends in the Chinese capital market, with an emphasis on stock dividends. We begin by separately investigating the cumulative abnormal returns around the announcements of cash, stock and combined dividends. Because earnings are announced concurrently with dividend decisions in China, and therefore the estimated abnormal returns could be confounded by the earnings effect, we attempt to examine the dividend announcement effect under different earnings signals. We find a strong announcement effect of stock dividends even after controlling for concurrent earnings surprises. In contrast, pure cash dividend stocks experience no significant price run-up around the announcements. In addition, we examine the difference in market reactions to a positive or negative earnings announcement as firms initiate, maintain or switch to different forms of payouts. It appears that switching from other types of dividends to stock dividends reinforces the earnings signal.Chapter three examines the effect of corporate governance and stock liquidity on corporate payout policy in the context of the split-share structure reform initiated in China in 2005. Under this reform, non-tradable shares were compulsorily converted into tradable shares. The reform removed a liquidity constraint; it also facilitated better alignment of the interests of controlling shareholders with those of outside investors. These changes led to significant improvements in firms' share liquidity and governance. We investigate the implications of share reform-induced governance and liquidity improvements for corporate dividend policy. First, we examine how listed firms' dividend policy responds to a governance and liquidity shock (i.e., the split-share structure reform) by comparing corporate dividend policy before and after the reform. Second, we explore the channels through which the reform affects corporate dividend policy by considering the effect of corporate governance and stock liquidity. We find that the average cash dividend payout decreases in the post-reform period and that the reduction in cash payouts is more pronounced among firms with higher growth rates and higher liquidity. Given the fundamental difference in controlling shareholders between state-controlled and privately controlled firms, the reduction in cash payouts appears to be more substantial in state-controlled firms. Our results are robust to different time horizons surrounding the reform. We also investigate whether the reform affects the decisions of firms to pay cash dividends. The results indicate that the propensity to pay cash dividends
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