Journal of International Financial Management and Accounting 13:2 2002
The Information Content of Concurrently
Announced Earnings, Cash Dividends, and
Stock Dividends: An Investigation of the
Chinese Stock Market
Gongmeng Chen, Michael Firth and Ning Gao
Department of Accountancy, The Hong Kong Polytechnic University
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.
1. Introduction
Ample literature exists that documents the value relevance of accounting
earnings. Research shows that earnings are positively related to share
prices, annual stock returns, and short term share price changes (Collins
et al., 1997). There are also research studies that demonstrate that cash
dividends have information content for security prices and returns
(Firth, 1996). In addition, some studies find that announcements of
stock dividends are associated with positive stock returns (Koski, 1998;
Crawford and Franz, 2001; Firth, 1977); this result is often attributed to
the stock dividend signaling “good news”. The majority of this research
The authors wish to thank the reviewers and Frederick Choi (the editor) for their helpful comments
on the paper. The authors acknowledge financial support for this project from Hong Kong Polytechnic
University Central Research Grants G-T074 and G-YB49. Correspondence: Michael Firth, Department of Accountancy, The Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong.
Phone: (852) 2766 7062; Fax: (852) 2330 9845; email: acmaf@inet.polyu.edu.hk
© Blackwell Publishers Ltd. 2002, 108 Cowley Road, Oxford OX4 1JF, UK and 350 Main Street, Malden, MA 02148, USA.
102
G. Chen, M. Firth and N. Gao
has been carried out on US data or on data from other developed market
economies, such as Australia, Britain, Canada, and Continental Europe. In
contrast, research conducted in less developed economies or in emerging
or transitional economies is significantly less.
The purpose of this paper is to report the results of a study that examines the information content of corporate earnings and dividend announcements made by companies in the People’s Republic of China (PRC).
In China, earnings are announced at the same time as cash dividends
and stock dividends. China’s stock markets opened at the beginning of the
1990s and are part of the economic restructuring that is transforming the
economy from a centrally planned system to a socialist-market system.
The newness of the markets, the relative lack of investor knowledge, and
different institutional features make China a unique environment in which
to conduct empirical accounting research; the findings from studies in the
USA and elsewhere cannot be automatically extrapolated to the PRC.
Our results, based on up to 1,232 joint announcements of earnings and
cash and stock dividends in China, show that unexpected earnings announcements, proxied by earnings change, have an impact on stock prices. There
is a positive association between earnings surprises and stock returns.
We find that if the earnings surprise is corroborated by a stock dividend
surprise of the same directional sign, then the earnings signal is stronger.
We conclude that accounting information is important in the pricing of
Chinese listed firms. Although the markets are very new and accounting
practices are relatively rudimentary, investors still rely on accounting earnings and they use stock dividends and, to a lesser extent, cash dividends as
corroboration measures. The stock market appears to value stock dividends
but changes in cash dividends have little incremental value.
The paper proceeds by briefly describing China’s nascent stock markets and the role of accounting information. The research design and data
sample is then described. The results and a discussion of the findings follows.
The final section presents the conclusions.
2. China’s Economic Reforms and the Corporatization
and Listing of SOEs
Beginning in the early 1980s China set about transforming its moribund
state controlled economy. At that time growth was stagnant and technology lagged far behind the market based economies of other countries.
The Chinese government recognized that urgent action was needed to
stimulate the economy to meet the aspirations of society and to contain
© Blackwell Publishers Ltd. 2002.
Concurrently Announced Earnings, Cash and Stock Dividends
103
social unrest. One of the major reforms was the freeing up of markets
where the state relinquished control over production, prices, and even, to
some extent, labor practices. Concomitantly, selected State Owned Enterprises (SOEs) were corporatized and many sold shares to outside investors.
This practice accelerated after the opening of the Shanghai Securities
Exchange (SHSE) in December 1990, and the Shenzhen Stock Exchange
(SZSE) in July 1991; these exchanges allow investors to buy and sell
shares more easily. Share turnover on the exchanges is high and the
average investment holding period of a share is two months.
Corporatizations involve the setting up of separate companies with
limited liability, ownership represented by share capital, and, usually, profit
making objectives. In most listed companies the state retains extensive
control or influence over the firm via its direct shareholding and via its
control or influence over many legal entity shareholders. On average about
one third of the shares are held by the state, one third by legal entities,1
and one third by individual or private shareholders. It is the individual or
private shares that are traded on the two stock exchanges. Shares sold to
domestic investors are termed A-shares while those sold to foreigners are
termed B-shares. In our sample about one fifth of A-share companies have
also issued B-shares. To date, the segmentation of A-shares and B-shares
has been very effective as witnessed by the very different market prices
for the two shares. Although carrying the same rights and receiving
the same dividends, albeit in different currencies,2 the market price of
A-shares are two to three times higher than for the B-shares.3
In contrast to developed markets, there are very few domestic institutional investors in China (apart from those controlled by the state). The
overwhelming majority of the A-shares are held by individuals, most
of whom have little or no experience in business or finance. There are far
fewer corporate disclosures in China and the annual accounts are perhaps
the major source of information for private investors. The annual accounts
are less detailed than those seen in developed nations. A-shareholders are
not sent annual accounts but, instead, can read the accounts as published
in the main financial newspapers.
Whether domestic investors use earnings announcements to price
A-shares is an empirical matter. While studies in developed markets have
shown earnings to have some information content (much, but not all, of
the earnings information is anticipated ahead of the profit announcement),
the picture is less clear in China. On the one hand, the lack of professional
analysts, the relatively limited knowledge of accounting and finance by
individual investors, and the perceived weakness of accounting practices,4
© Blackwell Publishers Ltd. 2002.
104
G. Chen, M. Firth and N. Gao
suggests that earnings announcements may have little impact on share
prices. On the other hand, investors have few other sources of information
on companies and so in a relative sense earnings announcements are perhaps
the most important piece of information with which to help value stocks.
A feature of Chinese listed firms is the variability in cash dividend
payments (Wei, 1999). Dividend decreases are as likely as dividend
increases; in our sample, decreases exceed increases. This contrasts with
the practices observed in developed economies where dividends are rarely
decreased and where increases are made only if they can be maintained
(or further increased) in the future. Cash dividends in China therefore
have different signalling properties than dividends in other countries.
Another feature of Chinese listed firms is the use of stock dividends.
Nearly half of all annual earnings announcements are accompanied by a
stock dividend. Anecdotal evidence suggests firms use stock dividends as
a substitute for cash dividends.
2.1 Concurrent Earnings and Dividend Announcements
One characteristic of the China environment is that cash dividends are
announced at the same time as earnings. This feature is also observed in
other countries5 but is infrequently seen in the USA. Previous research in
other countries has found that both earnings surprises and cash dividend
surprises are associated with abnormal returns (e.g., Bajaj and Vijh, 1990;
Firth, 1996) when they are announced on separate dates.6 There has been
relatively less research examining firms which announce dividends and
earnings concurrently. Kane et al. (1984) argued that because both earnings and dividends are noisy signals, investors evaluate the consistency
of these two measures when they are announced simultaneously. Here,
an unexpected increase in dividend will back-up (or corroborate) the
information conveyed by an unexpected increase in earnings. On the other
hand, an unexpected dividend decrease will attenuate the signal conveyed
by a contemporaneously announced unexpected increase in earnings. The
conventional view of dividend policy is that increases (decreases) will
only be made if the new dividend will be maintained or increased (maintained or decreased) in the near future. In this sense, dividend changes
may reflect future earnings levels and hence the permanence of earnings.
As noted earlier, dividend decreases are very common in China and so the
conventional view of dividend policy does not necessarily hold.
Aharony and Swary (1980) conclude that both cash dividend and earnings changes have information content in the USA. Their sample did not
© Blackwell Publishers Ltd. 2002.
Concurrently Announced Earnings, Cash and Stock Dividends
105
include any joint announcements of dividends and earnings (there are at
least ten days between the dividend and earnings announcements). Kane
et al. (1984) using US data examine earnings and cash dividends that are
announced within ten days of one another (but very few are announced
simultaneously). They find a strong interaction effect of cash dividends
and earnings on abnormal returns. The stock market reacts more favorably
if a cash dividend increase accompanies an earnings increase. Similarly,
a cash dividend decrease accompanying an earnings decrease results in
more negative abnormal returns. In contrast to Kane et al. (1984), Chang
and Chen (1991) find no evidence of an interaction effect in their study of
American companies using data from 1981–1984 (1,344 observations).7
Leftwich and Zmijewski (1994), using a different research design, conclude
that there are some interactions between contemporaneously announced
cash dividends and earnings of American corporations (using data up to
1989). They also conclude that earnings are more closely associated with
abnormal returns than are cash dividends. Easton (1991) using Australian
data, reaches similar conclusions to Kane et al. (1984); he finds a significant interaction effect on abnormal returns for dual announcements
made in the period 1978–1980. Other Australian studies by Brown et al.
(1977) and How et al. (1992) reach similar conclusions. Larger absolute
abnormal returns are observed when the earnings and cash dividend
variables change in the same direction as compared to when they change
in different directions. Conroy et al. (2000) conclude that current cash
dividends have little impact on stock prices; instead, current earnings
and fore-casts of future dividends and earnings are positively related to
stock returns.
In China there are an approximately equal number of cash dividend and
stock dividend announcements. As stock dividends have no impact on
cash flows they should have no impact on stock prices. However, research
studies in the USA (e.g., Koski, 1998; Crawford and Franz, 2001) and the
UK (Firth, 1977) show that stock dividends are positively associated with
stock returns and this result is often attributed to stock dividends signalling good news. Chinese listed firms make heavy use of stock dividends
with one being made approximately every second year. These stock
dividends are announced at the same time as cash dividends and earnings.
The joint and separate impact of stock dividends, cash dividends, and
accounting profits has not been examined before. The unique features
of the firms listed on China’s stock exchange allow the joint and separate
impacts to be examined.
© Blackwell Publishers Ltd. 2002.
106
G. Chen, M. Firth and N. Gao
2.2 Prior Research on Earnings, Dividends and Firm Value in China
A small number of studies have examined the association between
accounting profits and firm value in China. Most of these studies have examined the value relevance of accounting data for explaining share price
levels and annual stock returns. In contrast, our study investigates short
interval abnormal stock returns surrounding the earnings announcement.
Prior studies have generally reported some association between accounting earnings and stock price levels and annual returns (Bao and Chow,
1999; Chen et al., 2000; Chen et al., 2001; Haw et al., 1999). Haw et al.
(2000) report that A-share earnings have information content for investors
using three-day market adjusted returns;8 they did not control for, or
evaluate the impact of, dividends.
There is relatively little research relating to the usefulness of dividends
in valuing companies in China. Wei (1999) reports a lot of variability in
dividends in the years 1992–1997. He also finds that dividend changes are
associated with future earnings changes. A number of other articles (all
in Chinese) examine cash dividends and stock dividends but they do not
explicitly control for the joint effects and they do not consider concurrently announced earnings. Wei (1998) concludes that stock dividends are
valued more highly than cash dividends but Zhang and Han (1997) reach
the opposite conclusion. Chen et al. (1998) and Lu and Wang (1999) also
examine the dividend behavior of Chinese listed firms but the research
designs lack sufficient controls to make their conclusions reliable.
3. Research Design
We examine the stock market’s reaction to earnings and cash and stock
dividend announcements. Abnormal returns are calculated over various
short-term intervals surrounding the announcement. As cash and stock
dividends are announced concurrently with earnings we need to disentangle
the impact of the three signals and to examine the interactions among
them. Our method to examine the joint impact of earnings and dividends
on stock returns is similar to that used by Kane et al. (1984) and Leftwich
and Zmijewski (1994). However, our design has to accommodate three
announcements rather than two.
Abnormal returns during the event window are calculated as the difference between actual returns and expected returns from the market model.
The market model parameters are calculated on 250 days of returns
(day –280 to day –31). Four windows (day –7 to day +7; day –5 to day +5;
© Blackwell Publishers Ltd. 2002.
Concurrently Announced Earnings, Cash and Stock Dividends
107
day –2 to day +2; and day –1 to day +1) are used. Because of the relative
lack of investor knowledge, stock prices may take some time to absorb the
impact of a dividend and earnings announcement and so an event window
as long as 15 days (day –7 to day +7) is used. In section 4, we report results
using the three-day window (day –1 to day +1); the other windows give
qualitatively similar results. The abnormal returns are modeled as a function of unexpected earnings, unexpected dividends, and their interactions.
As there are no data on earnings or dividend expectations in China we use
earnings changes and dividend changes as measures of unexpected earnings and dividends. These changes in earnings and dividends are scaled
by share price one day before the announcement. The earnings we use are
earnings before extraordinary items;9 extraordinary items are transient in
nature and they have smaller valuation implications. Unexpected earnings
(UE) is given by ((Et – Et – 1)/SPd – 1), unexpected cash dividends (UD) is
given by ((Dt – Dt – 1)/SPd – 1), and unexpected stock dividends is given by
((SDt – SDt – 1)/SPd – 1), where E is earnings per share, D is cash dividend
per share, SD is stock dividend per share, and SPd – 1 is the share price one
day before the announcement. Sensitivity tests where UE, UD, and USD
are scaled by Et – 1, Dt – 1, and SDt – 1, respectively, yield qualitatively similar
results to those that are scaled by SPd – 1.
3.1 Sample Data
Our sample is made up of dividend and earnings announcements made
by listed A-share companies in the period 1994–1997. The data comes
from the CSMAR database.10 Stock returns are adjusted for capitalization
changes. A total of 1,499 announcements are identified. There is missing
data, and the sample sizes used in the tests are 1,232 pairs of earnings11
and cash dividend announcements, 1,142 pairs of earnings and stock
dividend announcements, and 1,099 cases where earnings, cash dividends,
and stock dividends could be identified (even if a zero cash or stock
dividend). The missing data relate to cases where we could not locate
annual reports or where the reports are incomplete. The annual earnings
are based on domestic accounting standards.
3.2 Summary Statistics
Table 1 shows the composition of the sample by the signs of their unexpected earnings and unexpected dividends. Panel A shows the results for
earnings and cash dividends; panel B, the results for earnings and stock
© Blackwell Publishers Ltd. 2002.
108
G. Chen, M. Firth and N. Gao
Table 1. Sample Classification by Unexpected Earnings Change and
Unexpected Cash and Stock Dividend Change
Panel A: Unexpected Earnings and Unexpected Cash Dividends
Unexpected
Cash Dividend
Change (UD)
Unexpected Earnings Change (UE)
Positive
Zero
Negative
Total
Positive
Negative
Total
243
341
193
777
92
189
174
455
335
530
367
1,232
The chi-square test of the independence of the cash dividend and earnings portfolios: chi-square =
84.16. p-value = 0.00.
Panel B: Unexpected Earnings and Unexpected Stock Dividends
Unexpected
Stock Dividend
Change
Unexpected Earnings Change (UE)
Positive
Zero
Negative
Total
Positive
Negative
Total
196
286
189
671
71
254
146
471
267
540
335
1,142
The chi-square test of the independence of the stock dividend and earnings portfolios: chi-square =
141.03. p-value = 0.00.
Panel C: Unexpected Earnings and Unexpected Cash and Stock Dividends
Unexpected Dividend Change
Unexpected Earnings Change (UE)
UD
USD
Positive
Negative
Total
Positive
Positive
Positive
Zero
Zero
Zero
Negative
Negative
Negative
Positive
Zero
Negative
Positive
Zero
Negative
Positive
Zero
Negative
29
60
59
116
155
66
51
42
64
642
11
46
29
30
123
66
30
71
51
457
40
106
88
146
278
132
81
113
115
1,099
Total
The chi-square test of the independence of the dividend and earnings portfolios: chi-square = 260.86.
p-value = 0.00. UE = (Et – Et – 1)/SPd – 1; UD = (Dt – Dt – 1)/SPd – 1; USD = (SDt – SDt – 1)/SPd – 1.
Et and Et – 1 are the earnings per share at year t and year t – 1, respectively; Dt and Dt – 1 are the cash
dividends per share at year t and year t – 1, respectively; SDt and SDt – 1 are the stock dividends per share
at year t and year t – 1, respectively; and SPd – 1 is the share price on the day prior to the earnings and
dividend announcement.
© Blackwell Publishers Ltd. 2002.
Concurrently Announced Earnings, Cash and Stock Dividends
109
dividends; and panel C, the results for earnings and both cash and stock
dividends. About 63 per cent of the sample has positive earnings surprises
(proxied by increases in earnings per share) and 37 per cent have negative
earnings surprises (proxied by decreases in earnings per share). There are
no cases of zero change in earnings.
As shown in panel A, approximately 27 per cent of firms increase cash
dividends (n = 335), 43 per cent have no change in dividends (n = 530),
and 30 per cent decrease dividends (n = 367). The proportion of firms
decreasing dividends is higher than in many other countries and the proportion reporting no change is much lower than in Australia and the USA
(How et al., 1992; Leftwich and Zmijewski, 1994). A casual inspection
of Table 1, panel A, suggests increases in cash dividends occur when
earnings increase. Dividend decreases, however, occur about equally for
both positive and negative changes in earnings. The chi-square test of the
independence of the cash dividend and earnings partitions rejects the null
hypothesis of independence. The chi-square value is 84.16 with a p-value
of 0.00. A correlation test between unexpected earnings and unexpected
dividends indicates a modest level of dependence; the correlation is 0.115
(which is significant at the 0.01 level).12
The unexpected changes in stock dividends (see Table 1, Panel B) show
a similar pattern to the unexpected changes in cash dividends (Panel A).
The chi-square test of the independence of stock dividends and earnings
partitions rejects the null hypothesis of independence. The correlation
between unexpected earnings and unexpected stock dividends is 0.074,
significant at the 0.05 level; the correlation is lower than for earnings and
cash dividends.13
Although the patterns in Table 1, Panels A and B appear similar, further
evidence suggests that cash dividends and stock dividends may be
substitutes. The correlations between cash dividends and stock dividends
are –0.142 (for the total sample) and –0.237 (when the sample is restricted
to firms that have a policy of paying cash dividends and stock dividends);
both correlations are significant at the 0.01 level. The negative sign implies firms increase stock dividends when the cash dividend is decreased
(and vice-versa). Table 1, Panel C corroborates the correlations. There
are 40 cases where both cash dividends and stock dividends increase but
there are 88 cases of cash dividend increases and stock dividend decreases.
Weaker evidence is shown when cash dividends are reduced (see the
bottom of Panel C); there are a substantial number of cases where cash
dividends are reduced yet stock dividends are increased (n = 81).
© Blackwell Publishers Ltd. 2002.
110
G. Chen, M. Firth and N. Gao
4. Results
Table 2, Panel A presents some basic statistics on abnormal returns for
each of the six partitions of the sample: earnings increase, cash dividend
increase (E+, D+); earnings increase, cash dividend no change (E+, DO);
earnings increase, cash dividend decrease (E+, D–); earnings decrease,
cash dividend increase (E–, D+), earnings decrease, cash dividend no
change (E–, DO); and earnings decrease, cash dividend decrease (E–, D–).
The results show that higher abnormal returns are associated with earnings increases. The average abnormal return for earnings increases (when
dividends decrease) is 0.41 per cent, while the average abnormal return
for earnings decreases (when dividends decrease) is –2.90 per cent; the
difference in abnormal returns, 3.31 per cent, is statistically significant
at the 0.01 level (t-statistic = 4.30). Similar patterns are observed when
dividends are unchanged and when dividends increase; abnormal returns are
higher for earnings increases than for earnings decreases (t-statistics
are 5.70 and 2.40, respectively). Across all the dividend partitions, negative
abnormal returns of –2.70 per cent are reported for earnings decreases and
positive abnormal returns of 0.30 per cent are reported for earnings increases;
the average return for earnings decreases are statistically significant at
the 0.01 level (t = –8.46). In contrast to earnings, the direction of change
in dividends has a lower association with abnormal returns. The average
abnormal return for dividend increases (when earnings decrease) is –2.10
per cent and the average abnormal return for dividend decreases (when
earnings decrease) is –2.90 per cent. The difference in abnormal returns
(–2.10 – (–2.90) = 0.80) is not statistically significant (t = 0.90). The
difference in abnormal returns across dividend increases and dividend
decreases (when earnings increase) is also not significant (t = –0.85). The
results from Table 2, Panel A suggest that stock returns are more sensitive
to changes in earnings than to changes in cash dividends.
Table 2, Panel B shows the abnormal returns for the six partitions of
earnings and stock dividends. Abnormal returns are higher for unexpected
earnings increases than for earnings decreases; this applies across all three
levels of unexpected stock dividends. In contrast to panel A, the panel B
results show that abnormal returns differ depending on whether the stock
dividend increases or decreases. The difference between an excess return
of –3.36 per cent and –0.76 per cent (2.60 per cent) is statistically significant
(t = 2.58) for the negative earnings news partition. Similar evidence is shown
for the positive earnings news partition. The panel B results indicate that
stock prices are affected by unexpected stock dividends. The highest excess
© Blackwell Publishers Ltd. 2002.
Concurrently Announced Earnings, Cash and Stock Dividends
111
Table 2. Average Abnormal Stock Returns Partitioned on the Basis of the
Signs of Unexpected Earnings (UE) and Unexpected Cash Dividends (UD)
and Unexpected Stock Dividends (USD)
Unexpected Earnings (UE)
Unexpected Cash
Dividends (UD)
UE , 0
UE . 0
Row totals
t-statistics
comparing
UE , 0 to
UE . 0
Panel A: Unexpected Earnings and Unexpected Cash Dividends
UD , 0
Excess return
standard error
t-statistics
No. observations
UD = 0
Excess return
standard error
t-statistics
No. observations
UD . 0
Excess return
standard error
t-statistics
No. observations
t-statistics comparing
UD , 0 to UD . 0
Column
Excess return
totals
standard error
t-statistics
No. observations
–2.90%
7.81%
–4.94
174
–2.90%
6.84%
–5.55
189
–2.10%
4.24%
–4.84
92
0.90
0.41%
7.01%
0.81
193
0.59%
6.31%
1.70
341
–0.18%
7.36%
–0.387
243
–0.85
–1.20%
7.57%
–2.97
367
–0.60%
6.70%
–2.04
530
–0.72%
6.70%
–1.97
335
–2.70%
6.80%
–8.46
455
0.30%
6.83%
1.22
777
–0.81%
6.97%
–4.03
1,232
4.30
5.70
2.40
Panel B: Unexpected Earnings and Unexpected Stock Dividends
USD , 0
Excess return
standard error
t-statistics
No. observations
USD = 0
Excess return
standard error
t-statistics
No. observations
USD . 0
Excess return
standard error
t-statistics
No. observations
t-statistics comparing
USD , 0 to USD . 0
Column
Excess return
totals
standard error
t-statistics
No. observations
–3.36%
6.97%
–5.83
146
–3.00%
7.31%
–6.38
254
–0.76%
6.94%
–0.93
71
2.58
0.04%
6.67%
0.07
189
–0.16%
5.48%
–0.50
286
2.43%
8.87%
3.81
196
2.98
–1.44%
6.99%
–3.78
335
–1.47%
6.54%
5.15
540
1.57%
8.50%
3.01
267
–2.77%
7.18%
–8.25
471
0.07%
7.04%
2.38
671
–0.75%
7.29%
–3.43
1,142
4.53
5.05
2.74
2.50
UE = (Et – Et – 1)/SPd – 1; UD = (Dt – Dt – 1)/SPd – 1; USD = (SDt – SDt – 1)/SPd – 1. Et and Et – 1 are the earnings
per share at year t and year t – 1, respectively; Dt and Dt – 1 are the cash dividends per share at year t and
year t – 1, respectively; SDt and SDt – 1 are the stock dividends per share at year t and year t – 1, respectively;
and SPd – 1 is the share price on the day prior to the earnings and dividend announcement. 3-day
abnormal returns (day –1 to day +1, where day 0 = announcement date) based on the market model.
© Blackwell Publishers Ltd. 2002.
112
G. Chen, M. Firth and N. Gao
stock returns accrue to firms that jointly announce unexpectedly good
earnings and a stock dividend increase. The lowest excess stock returns
accrue to firms that have unexpectedly poor earnings and which also
reduce stock dividends. Based on the results in Table 2, Panels A and B,
it appears that stock dividends are more important than cash dividends in
corroborating or modifying the stock price response to unexpected earnings.
While Table 2 provides a test of the incremental information content of
the signs of the earnings and cash and stock dividend signals, it does not
examine the magnitudes of the information signals. The results reported
in Table 2 will be influenced by the magnitude of the earnings and cash
and stock dividend changes, as well as the signs of those changes.
Table 3, Panel A shows the mean magnitude of the earnings and cash
dividend changes in each of the six partitions corresponding to the sign
of changes. By design, the unexpected earnings for UE . 0 significantly
exceed the unexpected earnings for UE , 0. When UD is negative, the unexpected dividend for UE . 0 exceeds the unexpected dividend for UE , 0
(t-statistic of 2.61). The unexpected earnings are highest (0.21 per cent)
when dividends do not change. For positive unexpected earnings, UE is
lowest (0.13 per cent) when there is an increase in dividend; this result is
quite surprising and contrasts sharply with Leftwich and Zmijewski (1994).
Table 3, Panel B presents the unexpected earnings and unexpected
stock dividends partitioned on the sign of the change in earnings and the
change in stock dividend. The highest unexpected earnings in Table 3,
panel B, is 0.22 per cent and this occurs when stock dividends increase.
The lowest unexpected earnings (–0.38 per cent) occurs when there is no
change in stock dividend; the next lowest earnings (–0.30 per cent) occurs
when there is a decrease in stock dividend. The evidence implies a positive
association between changes in earnings and changes in stock dividends.
4.1 Regression Results
Following Kane et al. (1984), Easton (1991), How et al. (1992), and
Leftwich and Zmijewski (1994), we use regression tests to examine the
association between abnormal returns and measures of earnings change,
cash and stock dividend change, and the interactions of earnings and
dividends. The models are:
CAR = β0 + β1UE + β2UD + β3USD
18
30
42
i =1
i = 19
i = 31
CAR = β 0 + ∑ βiUE ( ECS ) + ∑ βiUD ( ECS ) + ∑ βiUSD ( ECS )
© Blackwell Publishers Ltd. 2002.
(1)
(2)
Concurrently Announced Earnings, Cash and Stock Dividends
113
Table 3. Mean Unexpected Earnings and Dividends Partitioned on the Basis of
the Signs on Unexpected Earnings (UE) and Unexpected Cash Dividends (UD)
and Unexpected Stock Dividends (USD)
Unexpected Earnings (UE)
Unexpected Cash
Dividends (UD)
UE , 0
UE . 0
Row totals
Panel A: Unexpected Earnings and Unexpected Cash Dividends
UD , 0 Unexpected Earnings
Mean
–0.35%
0.18%
–0.07%
Standard deviation
0.52%
0.32%
0.50%
Unexpected Dividend
Mean
–1.76%
–1.40%
–1.57%
Standard deviation
1.41%
1.23%
1.33%
No. observations
174
193
367
UD = 0 Unexpected Earnings
Mean
–0.36%
0.21%
–0.01%
Standard deviation
0.49%
0.46%
0.55%
Unexpected Dividend
Mean
0.00
0.00
0.00
Standard deviation
0.00
0.00
0.00
No. observations
189
341
530
UD . 0 Unexpected Earnings
Mean
–0.17%
0.13%
0.04%
Standard deviation
0.18%
0.20%
0.24%
Unexpected Dividend
Mean
2.12%
2.41%
2.33%
Standard deviation
1.91%
2.09%
2.04%
No. observations
92
243
335
t-statistics comparing
UD , 0 to UD . 0
Unexpected Earnings
2.84
1.57
Unexpected Dividend
18.79
22.32
Column Unexpected Earnings
totals
Mean
–0.32%
0.18%
–0.02%
Standard deviation
0.47%
0.36%
0.48%
Unexpected Dividend
Mean
–0.24%
0.41%
0.17%
Standard deviation
1.88%
1.97%
1.95%
No. observations
455
777
1,232
Panel B: Unexpected Earnings and Unexpected Stock Dividends
USD , 0 Unexpected Earnings
Mean
–0.30%
0.14%
–0.06%
Standard deviation
0.37%
0.31%
0.40%
Unexpected Dividend
Mean
–3.44%
–3.95%
–3.72%
Standard deviation
3.08%
4.42%
3.90%
No. observations
146
189
335
t-statistics
comparing
UE , 0 to
UE . 0
11.75
2.61
12.21
11.55
1.16
11.73
1.19
© Blackwell Publishers Ltd. 2002.
114
G. Chen, M. Firth and N. Gao
Table 3. Continued
Unexpected Earnings (UE)
Unexpected Cash
Dividends (UD)
UE , 0
USD = 0 Unexpected Earnings
Mean
–0.38%
Standard deviation
0.55%
Unexpected Dividend
Mean
0.00
Standard deviation
0.00
No. observations
254
USD . 0 Unexpected Earnings
Mean
–0.19%
Standard deviation
0.22%
Unexpected Dividend
Mean
2.46%
Standard deviation
1.70%
No. observations
71
t-statistics comparing
USD , 0 to USD . 0
Unexpected Earnings
2.27
Unexpected Dividend 15.07
Column Unexpected Earnings
totals
Mean
–0.33%
Standard deviation
0.47%
Unexpected Dividend
Mean
–0.69%
Standard deviation
2.73%
No. observations
471
UE . 0
0.19%
0.45%
0.00
0.00
286
Row totals
–0.08%
0.57%
t-statistics
comparing
UE , 0 to
UE . 0
13.31
0.00
0.00
540
0.22%
0.35%
0.11%
0.37%
9.24
2.62%
1.68%
196
2.58%
1.69%
267
0.68
2.39
19.40
0.18%
0.39%
–0.03%
0.49%
–0.35%
3.55%
671
–0.49%
3.24%
1,142
UE = (Et – Et – 1)/SPd – 1; UD = (Dt – Dt – 1)/SPd – 1; USD = (SDt – SDt – 1)/SPd – 1.
Et and Et – 1 are the earnings per share at year t and year t – 1, respectively; Dt and Dt – 1 are the cash
dividends per share at time t and t – 1, respectively; SDt and SDt – 1 are the stock dividends per share at
year t and year t – 1, respectively; and SPd – 1 is the share price on the day prior to the earnings and
dividend announcement.
where
CAR = abnormal return over the three-day period surrounding the earnings and dividend announcement14
UE = unexpected earnings proxied by the change in earnings
UD = unexpected cash dividend proxied by the change in cash dividend
USD = unexpected stock dividend proxied by the change in stock dividend
(ECS) = a dummy variable made up of three components relating to
the sign of the earnings change (E = + or –), cash dividend change (C = +
or 0 or –), and stock dividend change (S = + or 0 or –). For example, if
© Blackwell Publishers Ltd. 2002.
Concurrently Announced Earnings, Cash and Stock Dividends
115
earnings, cash dividend, and stock dividend all increase then (ECS = +++)
is coded one, otherwise it is coded zero. If earnings and cash dividend
increase and stock dividend is unchanged then (ECS = ++0) is coded one,
otherwise it is coded zero. (ECS) takes eighteen values: (+++), (++0),
(++–), (+0+), (+00), (+0–), (+–+), (+–0), (+– –), (–++), (– +0), (–+–),
(–0+), (–00), (–0–), (– –+), (– –0), and (– – –). Unlike Leftwich and
Zmijewski (1994), we have no observations of zero unexpected earnings.
For UD there are twelve dummy variables: (+++), (++0), (++–), (+– +),
(+–0), (+– –), (– ++), (– +0), (–+–), (–– +), (– –0), and (– – –). For USD
there are twelve dummy variables: (+++), (++–), (+0+), (+0–), (+– +),
(+– –), (–++), (–+–), (–0+), (–0 –), (–– +), and (– – –). In all cases, the first
sign relates to the change in earnings, the second sign relates to the change
in cash dividend, and the third sign relates to the change in stock dividend.
The regression results for model 1 are shown in Table 4. The R-square
of model 1 is 0.053 and the F-statistic is significant. While the explanatory
power of the model is low, it compares favorably with the Australian
and US studies which examine earnings and cash dividends. UE, UD, and
USD have the expected positive signs indicating that positive earnings and
dividend surprises, proxied by earnings and dividend changes, lead to an
increase in stock price. The earnings change variable, UE, is statistically
significant at the 0.01 level as is the stock dividend variable, USD. The
unexpected cash dividend variable, UD, is significant at the 0.10 level.
The results indicate that the public announcements of unexpected earnings
Table 4. Regressions of Abnormal Returns on Unexpected Earnings (UE),
Unexpected Cash Dividends (UD), and Unexpected Stock Dividends
Variable
Coefficient
t-statistic
Intercept
UE
UD
USD
adjusted R2
F-value
–0.005
3.142
0.187
0.749
0.053
20.889***
–2.057**
6.262***
1.571*
3.746***
*** (**,*) statistically significant at the 0.01 (0.05, 0.10) level, one tail test.
UE = (Et – Et – 1)/SPd – 1; UD = (Dt – Dt – 1)/SPd – 1; USD = (SDt – SDt – 1)/SPd – 1.
Et and Et – 1 are the earnings per share at year t and year t – 1, respectively; Dt and Dt – 1 are the cash
dividends per share at year t and year t – 1, respectively; SDt and SDt – 1 are the stock dividends per share
at year t and year t – 1, respectively; and SPd – 1 is the share price on the day prior to the earnings and
dividend announcement.
3-day abnormal returns (day –1 to day +1, where day 0 = announcement date) based on the market
model.
© Blackwell Publishers Ltd. 2002.
116
G. Chen, M. Firth and N. Gao
and unexpected stock dividends are strongly associated with excess stock
returns.
To examine the interaction among earnings and dividend changes we
test model 2. The results of the model 2 regression are shown in Table 5.
As shown in Table 5, Panel A, the coefficients on the UE variables are
all positive and this is consistent with favorable earnings surprises being
associated with increases in stock prices (and unfavorable surprises being
associated with decreases in stock prices). The coefficients on UE tend to
be highest when the signs on the unexpected cash and stock dividends are
the same as the sign on the unexpected earnings. The t-statistics on the UE
variables are also higher when the signs on all three announcements are
the same. For example, the coefficient on UE (+++) is the second highest
and the sign on UE (+0+) is the highest. The sign on UE (– – –) is the highest for cases where the earnings change is negative. The evidence indicates
that if dividends (cash and stock) change in the same direction as earnings,
this reinforces or corroborates the earnings signal. This result is consistent
with prior research in Australia and the USA (Easton et al., 1992; How
et al., 1993; Kane et al., 1984; Leftwich and Zmijewski, 1994). Stock dividends appear to have a stronger corroborative impact than cash dividends. For
example, the coefficient on UE (+–+) is higher than the coefficient on UE
(++–). This result shows that the corroborative stock dividend signal increases
the impact of the positive earnings change (the coefficient is 7.461) compared
to when the cash dividend is corroborative (the coefficient is 3.473). Conversely, if the stock dividend signal conflicts with the earnings signal, then
the earnings change has a smaller impact or association with stock returns.
The coefficients on UD, shown in Table 5, Panel B, are not statistically
significant (at the 0.05 level) except for UD (++0) and UD (– ––). Leftwich
and Zmijewski (1994) also find that cash dividends are not significant in
their study of American data. Based on the results of Tables 4 and 5, cash
dividends play a more muted role than earnings in explaining abnormal
returns surrounding profit and cash dividend announcements in China.
One reason why dividends may play a minor role is that they are very
variable vis-à-vis other countries. Wei (1999) conjectures that the variability of dividends partly reflects the varying cash needs for expansion.
In this case dividends may be signaling future growth via an expansion of
the firm’s assets. If dividends do negatively correlate with expansion
(dividend decrease, expansion increase), then this has no impact on stock
prices. The results from Tables 4 and 5 are consistent with the dividend
irrelevance arguments of Modigliani and Miller (1958) and Miller and
Modigliani (1961).
© Blackwell Publishers Ltd. 2002.
Concurrently Announced Earnings, Cash and Stock Dividends
117
Table 5. Regressions of Abnormal Returns on Unexpected Earnings (UE),
Unexpected Cash Dividends (UD), and Unexpected Stock Dividends (USD),
and their Interactions
Variable
Coefficient
t-statistic
–1.053
9.432
9.126
3.473
10.365
4.951
4.268
7.461
6.035
1.100
0.988
2.560
5.266
0.738
2.673
4.975
3.000
2.837
6.070
–3.815***
4.157***
4.025***
2.862***
4.928***
2.914***
2.135**
2.216**
2.785***
1.969**
2.007**
2.137**
3.098***
1.849**
2.244**
2.843***
2.120**
2.005**
4.082***
0.019
0.043
0.263
–0.135
0.225
–0.382
0.093
0.351
–0.266
0.149
–0.122
0.475
1.012
0.984
1.839**
–0.821
0.860
–0.769
0.275
1.115
–1.002
0.864
0.996
2.017**
Panel A: UE coefficients
Intercept
UE (+++)
UE (++0)
UE (++–)
UE (+0+)
UE (+00)
UE (+0–)
UE (+–+)
UE (+–0)
UE (+– –)
UE (– ++)
UE (–+0)
UE (–+ –)
UE (–0+)
UE (–00)
UE (–0 –)
UE (– – +)
UE (– –0)
UE (– – –)
Panel B: UD coefficients
UD (+++)
UD (–++)
UD (++0)
UD (–+0)
UD (++–)
UD (–+–)
UD (+–+)
UD (– –+)
UD (+–0)
UD (––0)
UD (+– –)
UD (–– –)
Panel C: USD coefficients and control variables
USD (+++)
USD (–++)
USD (+0+)
USD (–0+)
USD (+–+)
USD (––+)
1.135
0.732
1.055
0.983
1.138
0.483
2.080**
0.841
1.783**
0.989
2.317**
1.138
© Blackwell Publishers Ltd. 2002.
118
G. Chen, M. Firth and N. Gao
Table 5. Continued
Variable
USD (++ –)
USD (–+–)
USD (+0 –)
USD (–0–)
USD (+– –)
USD (– ––)
Adjusted R2
F-value
Coefficient
t-statistic
0.209
1.983
0.738
2.068
1.186
3.142
0.169
5.878***
1.004
2.443***
1.083
2.538***
1.203
2.689***
*** (**,*) statistically significant at the 0.01 (0.05, 0.10) level, one tail test.
UE = (Et – Et – 1)/SPd – 1; UD = (Dt – Dt – 1)/SPd – 1; USD = (SDt – SDt – 1)/SPd – 1.
Et and Et – 1 are the earnings at year t and year t – 1, respectively; Dt and Dt – 1 are the cash dividends at
year t and t – 1, respectively; SDt and SDt – 1 are the stock dividends at year t and t – 1, respectively;
and SPd – 1 is the share price on the day prior to the earnings and dividend announcement.
3-day abnormal returns (day –1 to day +1, where day 0 = announcement date) based on the market
model.
(+++) is a dummy variable coded one if UE, UD and USD are all positive, otherwise coded zero;
(++0) is a dummy variable coded one if UE and UD are positive and USD is zero; the other dummy
variables follow on in a similar fashion. The first sign (+ or –) refers to the sign of the change in
earnings; there are no zero changes in earnings. The second sign (+ or 0 or –) refers to the sign of the
change in cash dividends. The third sign (+ or 0 or –) refers to the sign of the change in stock dividend.
Table 5, Panel C shows the results for the stock dividend variable
(USD). The coefficients on USD are all positive indicating that higher
stock dividend changes are associated with higher stock returns. The
results show that when the earnings change is in the same direction as the
change in stock dividend, the coefficients on USD are higher; in general,
the t-statistics are also higher. Of the seven USD coefficients that exceed
one, six occur when the sign on the earnings change is the same as the sign
on the stock dividend change. Changes in stock dividends are related to
stock returns and the strength of the association depends on the sign of
the earnings change. If the earnings sign corroborates the stock dividend
sign, then the change in stock dividend is a stronger signal of firm value
(in terms of statistical significance and magnitude of the coefficient). The
impact of a change in stock dividend on stock prices is more muted if
the earnings change has an opposite sign; in this case the USD coefficients
are not statistically significant. The sign on the cash dividend change has
less influence on the magnitude of the USD coefficients.
Although stock dividends do not involve any cash flows they do appear
to have some association with stock returns. Research in other countries
(e.g., McNichols and Dravid, 1990; Koski, 1998; Crawford and Franz, 2001;
Firth, 1977) also finds a positive association between stock dividends
© Blackwell Publishers Ltd. 2002.
Concurrently Announced Earnings, Cash and Stock Dividends
119
and stock returns. These findings are usually attributed to stock dividends
signaling improved future prospects for the companies concerned. One
distinguishing characteristic of China’s listed companies is the very frequent use of stock dividends and the variability in the stock dividend ratio15
across years. There is modest empirical evidence of stock dividends being
used as a substitute for cash dividends.
4.2 Sensitivity Tests
In order to test the robustness of our findings, a number of sensitivity tests
are conducted. In general the results from the sensitivity tests corroborate
the findings reported in Tables 2–5. The sensitivity tests examine alternative
earnings and cash and stock dividend expectations models and control for
other information releases.
Unexpected changes in earnings and cash and stock dividends are
estimated by earnings and dividend changes. Thus earnings and cash and
stock dividends in year t – 1 are used as the expectations for year t. As an
alternative, we also measure earnings and cash and stock dividend expectations as year t – 1 earnings and dividends multiplied by one plus the growth
rate in earnings and dividends from year t – 2 to year t – 1. The results from
using the alternative growth model specification mirror those reported in
Tables 2–5. Unfortunately there is little earnings expectations data (from
investment analysts) in China and there is no source of expectations data
for cash and stock dividends; because of this lack of expectations data,
the variable measurements used by Leftwich and Zmijewski (1994) and
Conroy et al. (2000) cannot be used.
In our sample, 127 companies disclose a rights issue16 at the same time
as announcing dividends and earnings. Given that rights issues and other
seasoned equity offerings have been found to have an impact on stock
prices in other countries, it is necessary to control or partition the sample
for rights issues. We partition our sample on the basis of whether a company concurrently announces a rights issue or not. The results for the sample
that do not concurrently announce a rights issue (sample size = 1,105) are
very similar to those reported in Tables 2–5. The results for the sample of
127 companies that announce a rights issue are much weaker than those
reported in Tables 2–5. The relatively small number of rights issues leads
to higher standard errors of the regression coefficients and hence lower
significance levels. A model that incorporates the interaction of rights
offers, earnings, and dividends has a poor statistical fit and individual
regression coefficients are generally not significant.
© Blackwell Publishers Ltd. 2002.
120
G. Chen, M. Firth and N. Gao
The correlation between unexpected dividends and rights issues is 0.078
that is significant at the 0.01 level. Dividends are therefore increased if a
firm simultaneously announces a rights offering. By increasing the dividend,
company managers may believe this makes rights offers more appealing
to investors. At the same time it might dispel investors’ concerns that rights
issues are being made because of a severe cash crisis.
Some listed firms have never paid a cash dividend (n = 331). In our
analyses they are regarded as having no change in dividend. These types
of “no change in dividend” are different from cases where firms pay the
same cash dividend as in the previous year (n = 199). We therefore rerun
the analyses where firms are omitted if they have never paid a cash dividend
in the period 1994–1997. The results from using the reduced sample are
very similar to those reported in Tables 2–5.
We partition the data on the basis of public ownership of shares.
Although the state invariably has a controlling interest in listed firms,
there is a lot of variability in the level of public ownership. Publicly owned
shares are the shares traded on the stock exchanges. Chen et al. (2001)
argue that accounting information in China has more relevance for market
prices if public ownership is high. They test their predictions on the annual
earnings and book value data of Chinese firms in the period 1991–1997
and find that R2s and the significance of coefficients are higher for firms
with a higher percentage of public ownership. Following Chen et al. (2001)
we split our sample into a group with public ownership above the median
and a group with public ownership below the median. The equation (2)
regression results for the two groups are similar in terms of the relative
importance of the coefficients.17 However, like Chen et al. (2001), we find
a higher R2 for the high public ownership group; the statistical significances
of the individual regression coefficients are also higher for the high public
ownership group. Although the high public ownership group has a better
statistical fit, the overall pattern of the results is similar to the low public
ownership group. The results are therefore robust across above-median
and below-median public ownership of shares.
The results reported in Tables 2, 4 and 5 use the three-day abnormal
returns as the measure of stock market performance (Table 2) and as the
dependent variable in models 1 and 2 (Tables 4 and 5). When 5-, 11- and
15-day abnormal returns are used, the results are qualitatively the same as
those shown in Tables 2, 4 and 5.
Finally, the sample is partitioned on the basis of listing exchange
(Shanghai or Shenzhen) and by whether the firm has B-shares listed
as well as A-shares at the time of the profit and dividend announcement.
© Blackwell Publishers Ltd. 2002.
Concurrently Announced Earnings, Cash and Stock Dividends
121
The results across these partitions are similar. Thus our findings are robust
across listing exchange and they are not affected by whether a company
has listed B-shares.
5. Summary and Conclusion
Corporate profits and cash dividends have been shown to have information content in the USA (Leftwich and Zmijewski, 1994) and some other
developed nations. Some studies have also shown that announcements of
stock dividends have a positive impact on stock returns. In contrast, there
is little or no research on earnings and cash and stock dividends of Chinese
listed companies. Because China’s stock markets and market-based economy
are very young and because of China’s unique institutional framework, the
conclusions from previous non-China research cannot be automatically
extrapolated to China.
Our results show that earnings announcements convey information
to the stock market and there is a positive relationship between changes
in profits and stock returns measured over short intervals of time. Stock
dividend announcements, which are released concomitantly with earnings
in China, embellish the signal from earnings. Increases in earnings that are
accompanied by increases in stock dividends have the largest regression
coefficient or earnings response coefficient. An earnings increase accompanied by a decrease in stock dividend has a smaller earnings response
coefficient. While earnings changes are positively associated with abnormal
returns, the magnitude of the relationship varies with the sign of the stock
dividend change. In short, stock dividend changes corroborate or modify
the earnings signal. Cash dividends, on the other hand, have weaker corroboration and moderation effects on the earnings number. Because cash
dividends involve a cash outlay while stock dividends do not, it is difficult
to explain why stock dividends have greater signaling properties in China’s
stock markets.
Based on our results, cash dividends have a limited signaling role. Cash
dividends appear to have no significant association with stock returns.
Dividends vary a lot in China and this may diminish its role as a signal.
The evidence is consistent with the cash dividend irrelevance arguments
postulated by Modigliani and Miller (1958) and Miller and Modigliani
(1961).
Although China’s stock markets are very young and investors have
limited knowledge and experience, the stock market does appear to incorporate earnings information in share prices and returns. Further development
© Blackwell Publishers Ltd. 2002.
122
G. Chen, M. Firth and N. Gao
of accounting standards, increased auditing skills, and advances in investor
education will make earnings information even more important in the
future. Cash dividend policy appears to be relatively unimportant as a
signaling device and many firms are eschewing cash dividends altogether.18
Stock dividends are more highly valued by investors but the reasons for
this await future research.
Notes
1. Legal entities include SOEs, institutions (including government owned institutions),
and the foreign partners of corporatized foreign joint ventures. Shares owned by legal
entities cannot be traded on the Shanghai and Shenzhen exchanges although some limited
buying and selling can be made through the Securities Trading Automated Quotation System
(STAQ) which is a country-wide computer-based exchange that started in July 1992.
2. A-share dividends and prices are in renminbi (RMB), the currency of the PRC.
B-shares traded on the SHSE are priced in US dollars (and dividends are paid in US dollars)
while B-shares traded on the SZSE are priced in Hong Kong dollars (and dividends are
paid in Hong Kong dollars). Apart from who can own the shares and the currencies used
for dividends and trading, B-shares rank pari passu with A-shares.
3. Poon et al. (1998) discuss reasons why the domestic shares (A-shares) have higher
values than the foreign shares (B-shares). In most other countries foreign shares are priced
higher than the domestic shares.
4. These weaknesses include the lack of accounting standards for many transactions
and practices, the lack of suitably qualified accounting personnel to apply and implement
standards, and the lack of independence and expertise of auditors.
5. Many firms in British Commonwealth countries follow this practice (e.g., Australia,
Britain, New Zealand, Singapore, etc.). Japan and Hong Kong also have this characteristic.
6. Modigliani and Miller (1958) and Miller and Modigliani (1961) develop propositions
that state that dividends are irrelevant in valuing firms. Other theoretical models have been
developed that seek to explain the empirical association between dividends and firm value
(see Benartzi et al., 1997, for a brief review of this literature).
7. Only 202 observations have earnings and dividends released within one day of one
another. Other observations have greater differences between the announcement dates.
8. Market adjusted returns imply a systematic risk of one for all shares. In contrast, we
use firm specific betas in our tests.
9. Replications of our test where earnings include extraordinary items do not change
the general tenor of our results.
10. CSMAR is a commercial database marketed by the GTA corporation.
11. Companies also publish half year profit numbers but dividends, if any, are usually
paid once a year. For this reason we use annual earnings. US research has used quarterly
data and Australian research has used half yearly data.
12. The correlation increases to 0.160 (significant at the 0.01 level) when firms with
no cash dividends across two years are omitted. Such firms may have a deliberate policy
of paying no cash dividends.
13. Omitting those cases where no stock dividends are paid across two years, the correlation improves to 0.150 (significant at the 0.01 level). These firms may have a deliberate
policy of having no stock dividends.
14. Five-day, 11-day and 15-day windows are also used.
15. The stock dividend ratio is the number of new shares for every share held.
© Blackwell Publishers Ltd. 2002.
Concurrently Announced Earnings, Cash and Stock Dividends
123
16. In China most seasoned equity offerings are in the form of rights offerings.
17. The regression results of the two groups for equation 1 are also similar.
18. A similar phenomena exists in the USA where many companies no longer pay
dividends and, instead, use share repurchases to return cash to shareholders.
References
Aharony, J. and I. Swary, “Quarterly Dividend and Earnings Announcements and Stockholders’ Returns: An Empirical Analysis,” Journal of Finance 35 (1980), pp. 1–12.
Bajaj, M. and A. Vijh, “Dividend Clienteles and the Information Content of Dividend
Changes,” Journal of Financial Economics 26 (1990), pp. 193–219.
Bao, B.-H. and L. Chow, “The Usefulness of Earnings and Book Value for Equity Valuation
in Emerging Capital Markets: Evidence from Companies in the People’s Republic of
China,” Journal of International Financial Management and Accounting 10(2) (1999),
pp. 85–104.
Benartzi, S., R. Michaely and R. Thaler, “Do Changes in Dividends Signal the Future or
the Past?,” Journal of Finance 52 (1997), pp. 1007–1034.
Brown, P., F. J. Finn and P. Hancock, “Dividend Changes, Earnings Reports and
Share Prices: Some Australian Findings,” Australian Journal of Management 2 (1977),
pp. 127–147.
Chang, S. J. and S. N. Chen, “Information Effects of Earnings and Dividend Announcements on Common Stock Returns: Are they Interactive?,” Journal of Economics and
Business 43 (1991), pp. 179–192.
Chen, X., X. Chen and N. Fan, “An Empirical Study of the First Dividend Announcements
after Listing,” Economics Science (1998), pp. 33–39 (in Chinese).
Chen, G., M. Firth and J.-B. Kim, “The Usefulness of Accounting Information for the
Valuation of Dual-class Shares in China’s Capital Markets,” Working paper (2000).
Chen, C. J.-P., S. Chen and X. Su, “Is Accounting Information Value-relevant in the
Emerging Chinese Stock Market?,” Journal of International Accounting, Auditing and
Taxation 10(1) (2001), pp. 1–22.
Collins, D. W., E. L. Maydew and I. S. Weiss, “Changes in the Value-relevance of Earnings
and Book Values over the Past Forty Years,” Journal of Accounting and Economics 24
(1997), pp. 39–67.
Conroy, R. M., K. M. Eades and R. S. Harris, “A Test of the Relative Pricing Effects of
Dividends and Earnings: Evidence from Simultaneous Announcements in Japan,”
Journal of Finance 55 (2000), pp. 1199–1227.
Crawford, D. and D. R. Franz, “Stock Dividends and Splits: Anticipation, Signaling, and
Market Response,” Journal of Accounting, Auditing & Finance 16(2) (2001), pp. 141–166.
Easton S., “Earnings and Dividends: Is there an Interaction Effect?,” Journal of Business
Finance and Accounting 18 (1991), pp. 255–266.
Firth, M., “Dividend Changes, Abnormal Returns, and Intra-industry Firm Valuations,”
Journal of Financial and Quantitative Analysis 31 (1996), pp. 189–211.
Firth, M., “An Empirical Investigation of the Impact of Capitalization Issues on Share
Prices,” Journal of Business Finance and Accounting 4 (1977), pp. 47–60.
Haw, I.-M., D. Qi and W. Wu, “Value Relevance of Earnings in an Emerging Capital
Market: The Case of A-shares in China,” Pacific Economic Review 4(3) (1999),
pp. 337–347.
Haw, I.-M., D. Qi and W. Wu, “Timeliness of Annual Report Releases and Market
Reaction to Earnings Announcements in an Emerging Capital Market: The Case of
China,” Journal of International Financial Management and Accounting 11(2) (2000),
pp. 108–131.
© Blackwell Publishers Ltd. 2002.
124
G. Chen, M. Firth and N. Gao
How, J. C. Y., C. S. Teo and H. Y. Izan, “The Interaction Effect of Earnings and Dividend
Announcements on Share Prices: Australian Evidence,” Managerial Finance 18 (1992),
pp. 22–33.
Kane, A., Y. K. Lee, and A. Marcus, “Earnings and Dividend Announcements: Is there a
Corroboration Effect?,” Journal of Finance 39 (1984), pp. 1091–1099.
Koski, J. L., “Measurement Effects and the Variance of Returns after Stock Splits and
Stock Dividends,” Review of Financial Studies 11 (1998) pp. 357–375.
Leftwich, R. and M. E. Zmijewski, “Contemporaneous Announcements of Dividends and
Earnings,” Journal of Accounting, Auditing & Finance 9 (1994), pp. 725–762.
Lu, C. and K. Wang, “Listed Companies’ Dividend Policies: An Empirical Analysis,”
Economics Research (1999), pp. 31–39 (in Chinese).
McNichols, M. and A. Dravid, “Stock Dividends, Stock Splits, and Signalling,” Journal of
Finance 45 (1990), pp. 857–879.
Miller, M. and F. Modigliani, “Dividend Policy, Growth, and the Valuation of Shares,”
Journal of Business 34 (1961), pp. 411–433.
Modigliani, F. and M. Miller, “The Cost of Capital, Corporation Finance and the Theory
of Investment,” American Economic Review 48 (1958), pp. 261–297.
Poon, W. P.-H., M. Firth and H.-G. Fung, “Asset Pricing in Segmented Capital Markets:
Preliminary Evidence from China-domiciled Companies,” Pacific-Basin Finance
Journal 6 (1998), 307–319.
Wei, G., “An Empirical Analysis of Dividend Announcements on Stock Prices,”
Economics Research (1998), pp. 30–36 (in Chinese).
Wei, G., “The Information Content of Dividend Announcements in China’s Stock Market,”
China Accounting and Finance Review 1(2) (1999), pp. 142–163.
Zhang, S. and D. Han, “An Empirical Study of Dividend Announcements on the Shanghai
Stock Market,” Forecast (1977), pp. 28–33 (in Chinese).
© Blackwell Publishers Ltd. 2002.