Analysis of Determinants Affecting Cash Dividends Policy of Listed Producing
Companies in China
Xiao-yan Liu1, Xiao-ming Liu2
1School of Economics and Management, North China Electric Power University, Beijing, China
2School of Economics and Management, North China Electric Power University, Beijing, China
(lliu716@sina.com)
Abstract - Distributing cash dividends is the main
means of paying cash to shareholders. Correct cash
dividends policy contributes to benefiting the companies in
many aspects such as the increase of the firm value. Also
because the institutional background of China’s corporate
sector is unique, the situation of factors that affecting the
cash dividends policy in China remains complicated and
different from foreign countries. Therefore,, we engage to
seek the factors that play an important role on cash
dividends paid. The analytic and empirical research result
shows that the profitability is significantly related to cash
dividends while size and growth have negative relationship
with cash dividends paid in producing listed companies.
This is helpful for listed firm regulators and management, as
well as investors.
Keywords - cash dividends, profitability, growth,
liquidity, size.
Many foreign scholars have researched the cash
dividends policy since the last century. However,
researches based on data of Chinese capital market have
not been reformed for a long time. Also because the
institutional background of China’s corporate sector is
unique, the situation of factors that affecting the cash
dividends policy in China remains complicated and
different from foreign countries. First, most listed firms in
the Shanghai and Shenzhen stock exchanges in China are
carve outs of state-owned enterprises, ownership by the
state is very high, and a majority or controlling ownership
is hold by the government, especially in big scale
industries such as producing industry. Second, before the
stock reform, a large fraction of the stocks of listed firms
are not available in the open market, but restricted in the
ownership by state-owned enterprises as reserved shares.
Investors, creditors and other outside users are not strong
enough to let the management, to make decisions for the
best interest of all shareholders because of the major
ownership of the state. Along with the completion of stock
reform, changes have occurred. Previous researches have
found that the ownership structure of corporate sector in
China is different from those in the U.S. and Europe (Lv
and Zhou, 2005). This paper engages to identify the key
factors affecting cash dividends policy in China through
an empirical research method, taking the producing
industry as the sample. Suggestions from this research
results are helpful both to governance regulators and
investors.
behavior of the major shareholders seizing the Minority
shareholders’ interests theory (Thaler and Shefrin, 1981).
In China, among the related theories, it seems that the
signaling theory is often adapted by researchers, as well as
the agency theory (Lee and Xiao, 2003). The institutional
background and high ownership concentration are the two
important factors distinguishing Chinese listed companies
from those in foreign counties (Lv and Zhou, 2005). Some
empirical research results indicate that Ownership by the
state influences the payout ratio of cash dividends and
stock dividends: the larger the ownership by the state, the
lower cash dividends and higher stock dividend. Several
other determinants also play important role on dividend
policies of Chinese listed companies in deferent degrees
such as size, growth, profitability, liquidity, leverage.
However among the factors affecting the cash
dividends policy, which ones are the most important
determinants? There is little research concentrating on this
question. In this paper, by taking the producing companies
Ⅰ. INTRODUCTION
Distributing Cash dividends is the main means of
paying cash to shareholders. The research on payout
policy is an important area of corporate finance. Correct
cash dividends policy contributes to benefiting the
companies in many aspects such as the increase of the firm
value. On the contrary, incorrect cash dividends policy
brings damages to the development of the company both
in current situation and in future. Accordingly, pay or not
pay cash dividends, how much should pay, it is a
controversial question.
Ⅱ. LITERATURES REVIEW
The determinants of firms’ dividend policies have
long been studied for a long time as a difficult title.
Theories of dividend policy include the major fowling :
(1) the bird in hand theory (Graham and Dodd, 1951),
According to this theory, cash dividends are considered
like a bird on hand while the retained earnings are like a
bird in the forest; (2) the dividend signaling theory (Miller
and Modigliani ,1961; Healy and Palepu, 1988; DeAngelo
et. al, 1992) thinks by distributing cash dividends, the
future information of companies can be released; (3)
agency theory (Easterbrook, 1984; Jensen ,1986) insists
that by the means of payout of cash to stockholders,
management has less cash to control, meanwhile agency
cost can be decreased and the equity of minority
shareholders can be protected ; (4) under the clientele
effect theory (Miller and Modigliani, 1961), firms
investors preferred cash dividends for its tax benefit while
single investors preferred capital gains; and (5) The
1
as sample, we analyze the most important factors that have
influence the cash dividends deeply in China. This is
helpful for the listed company regulators and
managements, as well as investors.
Ⅲ. EMPIRACAL ANALYSIS
A. Research hypothesis
Based on the above theories, we find that among
factors affecting the cash dividends policy profitability is
the most powerful one, at the same time growth, size and
liquidity work on cash dividend distributing too.
Profitability is also the resource of cash dividend.
Only the firms with profit can be able to pay cash to
stockholders. To be able to make payout, a firm must keep
revenues exceed expenses. After distributing the earnings
inside the firm, the remained earnings could be considered
to pay to owners outside the firm.
For investment purpose, enough earnings should be
kept inside the corporation and less cash dividends should
be distributed at the same time. Therefore, we conclude
the research hypothesis: the higher profitability, the more
cash dividends. In researches on profitability to cash
dividend policy, deferent indexes such as return on equity
(ROE) and earnings per share (EPS) are used. According
to the agency theory, the goal of management is to earn
profit for stockholders. Therefore, return of equity is
thought the best index to evaluate the efficiency of
management's job rather than other ratios such as EPS. In
our research, we take ROE as the main explaining proxy
to cash dividend.
DPS=α+β1* ROE+β2* NIIR +β3* TA +β4*
TATOR +ε
In this paper, we choose A-share producing
corporations listed in Shanghai stock market as our
sample, which paid cash dividends in year 2009. In order
to keep the sample effective, we exclude ST and *ST
companies, as well as those whose earnings is negative or
data is unavailable. As a result, we select 52 companies in
our sample. All the data is from CCER financial database
and Wanfang Finance. In analyzing the data, SPSS
software is used.
C. Empirical analysis result
From table 1, we can find that the coefficient of ROE to
DPS is positive (0.750) with t (8.132) and sig. (0.000) in
model (1), indicating the ROE and DPS are significantly
positively related at 0.01 level. The coefficient of TATOR
to DPS is positive, but not significant (t:1.410; sig:0.135).
The coefficients of NIIR to DPS and TA to DPS are
negative, significant at 0.1 level. At the same, the fact that
the each VIF of the variables is less than 2 show that there
is no multilinearity in model (1). Therefore, the results tell
us that the higher return on equity, the more cash per share
paid. On the contrary, the bigger size and higher level the
firm is, the less cash paid to shareholders. Also, the higher
level of growth the firms are, the more cash dividend
distributed.
Besides the profitability, the size and the liquidity are
important factors that can have big influence on cash
dividends policy. Keeping liquidity situation good is the
base for operating and development of a listed
corporation. Under the current accounting system, profit in
the current period always differs from cash balance of the
firm on the accrual basis. If there is not enough cash on
hand, cash dividends cannot be paid even though there is a
positive profit. Increasing the turn over rate of all kinds of
assets makes the current assets enough to satisfy the
demand of payout. The high assets turn over rate, the more
cash to be distribute.
Based on the above analysis, the following research
hypothesis is proposed:
The profitability is positively related to cash
dividends, that is, the higher profitability of a listed
company, the higher cash dividends could be paid.
B. Model selection and sample
Based on the previous research, we take cash
dividends per share (DPS) as the explained variable, the
ROE as a proxy variable of profitability, as well as the net
income increasing rate (NIIR), the log of total assets (TA)
and turn over rate of total assets(TATOR) as control
variables on behalf of growth, size and liquidity of a
corporation. The linear multi-regression model adopted is
as follows:
Unstandardized
Coefficients
Model (1)
(Constant)
ROE
NIIR
TA
TATOR
B
1.012
.168
Std. Error
.522
.021
-.024
TABLE 1 COEFFICIENTS
Standardized
Coefficients
Beta
.750***
t
1.939
8.132
Sig.
.059
.000
.013
-.177*
-1.841
-.042
.023
-.172*
.062
.044
.135
***. Correlation is significant at the 0.01 level (2-tailed).
*. Correlation is significant at the 0.1 level (2-tailed).
2
Co linearity
Statistics
VIF
Tolerance
.975
1.025
.072
.899
1.113
-1.858
.069
.969
1.032
1.410
.165
.907
1.103
Ⅳ. CONCLUSIONS
As analyzed above, through the empirical analysis we
conclude the following results:
Firstly, consistently with the whole listed companies
in china, producing industry pay less cash dividends. It is
not uncommon to pay no cash dividends to shareholders
nor pay high cash dividends.
Secondly, except liquidity, determinants of
profitability, growth and firm size are all related with cash
dividends in producing listed companies in different
degrees. Especially profitability is significantly positively
related with cash dividends, and growth and firm size are
negatively related with cash dividends paid. That is,
currently in China, when listed companies
determine distribution of cash dividend, they will consider
the profitability, growth and firm size more than other
factors. And the more retained earnings, the more cash
paid to shareholders as dividends. .
In summary, under the unique institutional
environment and capital market situation of China, among
the determinants that affecting cash dividends policy of
producing listed companies in producing industry,
profitability is the most important one. This is important to
both managements and investors for corporate governance
and economic decisions.
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