Analysis of Determinants Affecting Cash Dividends Policy of Listed Producing Companies in China

Xiao-yan Liu1, Xiao-ming Liu2 School of Economics and Management, North China Electric Power University, ei!ing, China 2 School of Economics and Management, North China Electric Power University, ei!ing, China "lliu#$%&sina'com(
Many foreign scholars have researched the cash dividends /olicy since the last century' 2owever, researches .ased on data of Chinese ca/ital mar3et have not .een reformed for a long time' 0lso .ecause the institutional .ac3ground of China4s cor/orate sector is uni1ue, the situation of factors that affecting the cash dividends /olicy in China remains com/licated and different from foreign countries' 5irst, most listed firms in the Shanghai and Shen6hen stoc3 e7changes in China are carve outs of state-owned enter/rises, ownershi/ .y the state is very high, and a ma!ority or controlling ownershi/ is hold .y the government, es/ecially in .ig scale industries such as /roducing industry' Second, .efore the stoc3 reform, a large fraction of the stoc3s of listed firms are not availa.le in the o/en mar3et, .ut restricted in the ownershi/ .y state-owned enter/rises as reserved shares' )nvestors, creditors and other outside users are not strong enough to let the management, to ma3e decisions for the .est interest of all shareholders .ecause of the ma!or ownershi/ of the state' 0long with the com/letion of stoc3 reform, changes have occurred' Previous researches have found that the ownershi/ structure of cor/orate sector in China is different from those in the U'S' and Euro/e "Lv and 8hou, 9::;(' *his /a/er engages to identify the 3ey factors affecting cash dividends /olicy in China through an em/irical research method, ta3ing the /roducing industry as the sam/le' Suggestions from this research results are hel/ful .oth to governance regulators and investors' .ehavior of the ma!or shareholders sei6ing the Minority shareholders4 interests theory "*haler and Shefrin, $@B$(' )n China, among the related theories, it seems that the signaling theory is often ada/ted .y researchers, as well as the agency theory "Lee and Xiao, 9::C(' *he institutional .ac3ground and high ownershi/ concentration are the two im/ortant factors distinguishing Chinese listed com/anies from those in foreign counties "Lv and 8hou, 9::;(' Some em/irical research results indicate that ,wnershi/ .y the state influences the /ayout ratio of cash dividends and stoc3 dividends> the larger the ownershi/ .y the state, the lower cash dividends and higher stoc3 dividend' Several other determinants also /lay im/ortant role on dividend /olicies of Chinese listed com/anies in deferent degrees such as si6e, growth, /rofita.ility, li1uidity, leverage' 2owever among the factors affecting the cash dividends /olicy, which ones are the most im/ortant determinantsF *here is little research concentrating on this 1uestion' )n this /a/er, .y ta3ing the /roducing com/anies as sam/le, we analy6e the most im/ortant factors that have

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 Chinas corporate sector is unique, the situation of factors that affecting the cash dividends policy in China remains complicated and different from foreign countries. herefore,, !e engage to seek the factors that play an important role on cash dividends paid. he analytic and empirical research result sho!s that the profitability is significantly related to cash dividends !hile si"e and gro!th have negative relationship !ith cash dividends paid in producing listed companies. his is helpful for listed firm regulators and management, as !ell as investors. Keywords - cash dividends, profitability, gro!th, liquidity, si"e.

' )N*+,-UC*),N -istri.uting Cash dividends is the main means of /aying cash to shareholders' *he research on /ayout /olicy is an im/ortant area of cor/orate finance' Correct cash dividends /olicy contri.utes to .enefiting the com/anies in many as/ects such as the increase of the firm value' ,n the contrary, incorrect cash dividends /olicy .rings damages to the develo/ment of the com/any .oth in current situation and in future' 0ccordingly, /ay or not /ay cash dividends, how much should /ay, it is a controversial 1uestion' ' L)*E+0*U+ES +E<)E= *he determinants of firms4 dividend /olicies have long .een studied for a long time as a difficult title' *heories of dividend /olicy include the ma!or fowling > "$( the .ird in hand theory "?raham and -odd, $@;$(, 0ccording to this theory, cash dividends are considered li3e a .ird on hand while the retained earnings are li3e a .ird in the forestA "9( the dividend signaling theory "Miller and Modigliani ,$@%$A 2ealy and Pale/u, $@BBA -e0ngelo et' al, $@@9( thin3s .y distri.uting cash dividends, the future information of com/anies can .e releasedA "C( agency theory "Easter.roo3, $@BDA Eensen ,$@B%( insists that .y the means of /ayout of cash to stoc3holders, management has less cash to control, meanwhile agency cost can .e decreased and the e1uity of minority shareholders can .e /rotected A "D( under the clientele effect theory "Miller and Modigliani, $@%$(, firms investors /referred cash dividends for its ta7 .enefit while single investors /referred ca/ital gainsA and ";( *he

influence the cash dividends dee/ly in China' *his is hel/ful for the listed com/any regulators and managements, as well as investors' ' EMP)+0C0L 0N0LGS)S 0' +esearch hy/othesis ased on the a.ove theories, we find that among factors affecting the cash dividends /olicy /rofita.ility is the most /owerful one, at the same time growth, si6e and li1uidity wor3 on cash dividend distri.uting too' Profita.ility is also the resource of cash dividend' ,nly the firms with /rofit can .e a.le to /ay cash to stoc3holders' *o .e a.le to ma3e /ayout, a firm must 3ee/ revenues e7ceed e7/enses' 0fter distri.uting the earnings

esides the /rofita.ility, the si6e and the li1uidity are im/ortant factors that can have .ig influence on cash dividends /olicy' Iee/ing li1uidity situation good is the .ase for o/erating and develo/ment of a listed cor/oration' Under the current accounting system, /rofit in the current /eriod always differs from cash .alance of the firm on the accrual .asis' )f there is not enough cash on hand, cash dividends cannot .e /aid even though there is a /ositive /rofit' )ncreasing the turn over rate of all 3inds of assets ma3es the current assets enough to satisfy the demand of /ayout' *he high assets turn over rate, the more cash to .e distri.ute' ased on the a.ove analysis, the following research hy/othesis is /ro/osed> *he /rofita.ility is /ositively related to cash dividends, that is, the higher /rofita.ility of a listed com/any, the higher cash dividends could .e /aid' ' Model selection and sam/le ased on the /revious research, we ta3e cash dividends /er share "-PS( as the e7/lained varia.le, the +,E as a /ro7y varia.le of /rofita.ility, as well as the net income increasing rate "N))+(, the log of total assets "*0( and turn over rate of total assets"*0*,+( as control varia.les on .ehalf of growth, si6e and li1uidity of a cor/oration' *he linear multi-regression model ado/ted is as follows>

inside the firm, the remained earnings could .e considered to /ay to owners outside the firm' 5or investment /ur/ose, enough earnings should .e 3e/t inside the cor/oration and less cash dividends should .e distri.uted at the same time' *herefore, we conclude the research hy/othesis> the higher profitability, the more cash dividends. )n researches on /rofita.ility to cash dividend /olicy, deferent inde7es such as return on e1uity "+,E( and earnings /er share "EPS( are used' 0ccording to the agency theory, the goal of management is to earn /rofit for stoc3holders' *herefore, return of e1uity is thought the .est inde7 to evaluate the efficiency of managementHs !o. rather than other ratios such as EPS' )n our research, we ta3e +,E as the main e7/laining /ro7y to cash dividend' -PSJKLM$N +,ELM9N N))+ LMCN *0 LMDN *0*,+ LO )n this /a/er, we choose 0-share /roducing cor/orations listed in Shanghai stoc3 mar3et as our sam/le, which /aid cash dividends in year 9::@' )n order to 3ee/ the sam/le effective, we e7clude S* and NS* com/anies, as well as those whose earnings is negative or data is unavaila.le' 0s a result, we select ;9 com/anies in our sam/le' 0ll the data is from CCE+ financial data.ase and =anfang 5inance' )n analy6ing the data, SPSS software is used' C' Em/irical analysis result 5rom ta.le $, we can find that the coefficient of +,E to -PS is /ositive ":'#;:( with t "B'$C9( and sig' ":':::( in model "$(, indicating the +,E and -PS are significantly /ositively related at :':$ level' *he coefficient of *0*,+ to -PS is /ositive, .ut not significant "t>$'D$:A sig>:'$C;(' *he coefficients of N))+ to -PS and *0 to -PS are negative, significant at :'$ level' 0t the same, the fact that the each <)5 of the varia.les is less than 9 show that there is no multilinearity in model "$(' *herefore, the results tell us that the higher return on e1uity, the more cash /er share /aid' ,n the contrary, the .igger si6e and higher level the firm is, the less cash /aid to shareholders' 0lso, the higher level of growth the firms are, the more cash dividend distri.uted'

Model "$( "Constant( +,E N))+ *0 *0*,+

Unstandardi6ed Coefficients

*0 LE $ C,E55)C)EN*S Standardi6ed t Coefficients

Sig' ':;@ '::: ':#9 ':%@ '$%;

$':$9 '$%B -':9D -':D9 ':%9

Std' Error ';99 ':9$ ':$C ':9C ':DD

eta

Co linearity Statistics *olerance <)5

'#;:### -'$### -'$#9# '$C;

$'@C@ B'$C9 -$'BD$ -$'B;B $'D$:

'@#; 'B@@ '@%@ '@:#

$':9; $'$$C $':C9 $'$:C

NNN' Correlation is significant at the :':$ level "9-tailed(' N' Correlation is significant at the :'$ level "9-tailed('

' C,NCLUS),NS 0s analy6ed a.ove, through the em/irical analysis we conclude the following results> 5irstly, consistently with the whole listed com/anies in china, /roducing industry /ay less cash dividends' )t is not uncommon to /ay no cash dividends to shareholders nor /ay high cash dividends' Secondly, e7ce/t li1uidity, determinants of /rofita.ility, growth and firm si6e are all related with cash dividends in /roducing listed com/anies in different degrees' Es/ecially /rofita.ility is significantly /ositively related with cash dividends, and growth and firm si6e are negatively related with cash dividends /aid' *hat is, currently in China, when listed com/anies

determine distri.ution of cash dividend, they will consider the /rofita.ility, growth and firm si6e more than other factors' 0nd the more retained earnings, the more cash /aid to shareholders as dividends' ' )n summary, under the uni1ue institutional environment and ca/ital mar3et situation of China, among the determinants that affecting cash dividends /olicy of /roducing listed com/anies in /roducing industry, /rofita.ility is the most im/ortant one' *his is im/ortant to .oth managements and investors for cor/orate governance and economic decisions'

C,N5E+ENCES [1] Millder, M'2', Modigliani 5' -ividend Policy, ?rowth and the <aluation of Shares, Eournal of usiness' $@%$,CD> D$$-DCC' P9Q lac3, 5ischer' *he -ividend Pu66le PEQ' Eournal of Portfolio Management, $@#%"9(>;-B' PCQ Eensen, Mec3ling' *heory of the firm> Managerial ehavior, 0gency Costs, and ,wnershi/ Structure PEQ' Eournal of 5inancial Economics, $@#%' PDQ 2ealy, P', Pale/u I' Earnings )nformation Conveyed .y -ividend )nitiations and ,missions, Eournal of 5inancial Economics, $@BB" 9$( $D@-$#;' P;Q Guan 2ong1i' 0nalysis of Cash -ividends Policy of ChinaHs Listed Com/aniesPEQ'5inance and Economics +esearch, 9::$"C('