The Information Content of Concurrently Announced Earnings, Cash Dividends, and Stock Dividends: An Investigation of the Chinese Stock Market

Abstract

The firms listed on China's stock market are less than ten years old and to date there has been relatively little research on the usefulness of their accounting disclosures for investors. This study focuses on the information content of annual earnings and dividend announcements made by listed Chinese companies. Earnings, cash dividends, and stock dividends are announced concurrently in China and so this allows for tests of their information usefulness and of the interactions between the three signals. Based on a data set of up to 1,232 announcements, we find that unexpected earnings, proxied by earnings changes, are positively related to abnormal returns. Thus, earnings are used by investors in setting market prices. Stock dividends corroborate or attenuate the earnings signal. If the sign of the unexpected stock dividend (increase, decrease) is the same as the sign of the unexpected earnings, then the earnings signal is stronger. If the signs are opposite, the earnings signal is weaker. Unexpected cash dividends have little impact on the earnings signal. Stock dividends per se have a small association with stock returns. In contrast, cash dividends have no discernible association with stock returns and this is consistent with dividend irrelevance arguments. Our results are robust across a number of sensitivity tests.

Effect of Dividend Payment on Stock Prices of Commercial Banks in Nepal: Panel Approach

“…Miller and Modigliani (1961) firstly introduced the concept of dividend irrelevance theory in which they explain that dividend policy does not affect stock prices. Many researchers like Black and Scholes (1974), Chen, Firth, and Gao (2002), Adefila, Oladipo and Adeoti (2004), Uddin and Chowdhury (2005), Denis and Osobov (2008), Adesola and Okwong (2009) provide the strong evidence in favour of dividend irrelevance theory, meaning that dividend does not influence share prices. Likely, Das and Samanta (2013) have pointed out that irrelevance theorem holds true in information technology sector in India in liberalized era.…”

Is the provision of more timely earnings information good for the Chinese stock market? : evidence from investor reactions to management earnings forecasts

“…Their empirical findings are consistent with their hypothesis -a negative association between institutional ownership and post-announcement abnormal returns. The seasonal random walk model of the earnings process is widely used in studies of the Chinese stock market (Chen et al 2002;Su 2003;Haw et al 2000).…”

Essays on corporate dividend policy: Chinese evidence

“…A stock dividend helps to reduce such information asymmetry by either directly signaling good information to investors (Miller and Rock (1985)) or by attracting media and analyst attention to make the stock price more desirable. In the Chinese context, Chen, Firth and Gao (2002) suggests that stock dividends are used to signal future earnings information to the market. A recent alternative theory is that firms pay cash dividends or stock dividends to cater to investor preferences (Baker and Wurgler (2004) Chinese companies are required to announce dividend decisions on the announcement day whether they decide to pay any dividend or not.…”

“…And they do not compare stock dividend announcement with the announcement of other forms of the distributions. Chen, et al (2002) conduct a study on the announcements made by listed A-share companies in China and show that stock dividend announcements, which are released simultaneously with earnings in China, corroborate or attenuate the signal from earnings. However, they do not explain why stock dividends have greater signaling properties than cash dividends in Chinese stock market and do not take into account combined cash and stock dividends either.…”

“…We consider a positive and a negative earnings surprise. Following Chen, et al (2002), we use earnings change as a measure for earnings surprise as there are no data on earnings expectations in China. The earnings surprise is then defined as the difference in net profits between the current and previous periods.…”