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Dividends for tunneling in a regulated economy: The case of China

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  • Chen, Donghua
  • Jian, Ming
  • Xu, Ming
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    Abstract

    Some Chinese listed companies pay out high dividends, despite the weak legal and institutional pressure on them to mitigate agency problems by paying dividends. We conjecture that such a phenomenon is caused by the differential pricing for tradable and non-tradable shares during the IPO of these listed companies. Such companies might use high-dividend payments to divert proceeds from an IPO or rights issue to controlling shareholders' pockets. The empirical results support our hypotheses, showing that companies with more differential pricing in the IPO, a recent IPO or rights issue, or more concentrated ownership tend to pay more dividends. Similarly, companies that are ultimately owned by the government tend to pay more dividends. Furthermore, a dividend increase accompanied by large IPO price discounts, a recent-year rights issue, an ROE qualified for rights issue, or great dividend variation is associated with more negative stock returns than other types of dividend increases. These findings indicate that dividends are not used purely for signaling or distributing free cash flows in China. Instead, dividends might be used by the controlling shareholders to engage in tunneling.

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    Bibliographic Info

    Article provided by Elsevier in its journal Pacific-Basin Finance Journal.

    Volume (Year): 17 (2009)
    Issue (Month): 2 (April)
    Pages: 209-223

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    Handle: RePEc:eee:pacfin:v:17:y:2009:i:2:p:209-223

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    Web page: http://www.elsevier.com/locate/pacfin

    Related research

    Keywords: Dividends Tunneling Regulations Corporate governance;

    References

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    1. Kim, Se-Jik, 2004. "Bailout and conglomeration," Journal of Financial Economics, Elsevier, vol. 71(2), pages 315-347, February.
    2. Jae-Seung Baek & Jun-Koo Kang & Inmoo Lee, 2006. "Business Groups and Tunneling: Evidencefrom Private Securities Offeringsby Korean Chaebols," Journal of Finance, American Finance Association, vol. 61(5), pages 2415-2449, October.
    3. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 2000. "Agency Problems and Dividend Policies around the World," Journal of Finance, American Finance Association, vol. 55(1), pages 1-33, 02.
    4. Stijn Claessens & Joseph P. H. Fan, 2002. "Corporate Governance in Asia: A Survey," International Review of Finance, International Review of Finance Ltd., vol. 3(2), pages 71-103.
    5. Eun, Cheol S. & Huang, Wei, 2007. "Asset pricing in China's domestic stock markets: Is there a logic?," Pacific-Basin Finance Journal, Elsevier, vol. 15(5), pages 452-480, November.
    6. Shin, Hyun-Han & Park, Young S., 1999. "Financing constraints and internal capital markets: Evidence from Korean 'chaebols'," Journal of Corporate Finance, Elsevier, vol. 5(2), pages 169-191, June.
    7. Kato, Hideaki Kiyoshi & Loewenstein, Uri & Tsay, Wenyuh, 2002. "Dividend policy, cash flow, and investment in Japan," Pacific-Basin Finance Journal, Elsevier, vol. 10(4), pages 443-473, September.
    8. Marianne Bertrand & Paras Mehta & Sendhil Mullainathan, 2002. "Ferreting Out Tunneling: An Application To Indian Business Groups," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 121-148, February.
    9. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
    10. Larry H. P. Lang & Mara Faccio & Leslie Young, 2001. "Dividends and Expropriation," American Economic Review, American Economic Association, vol. 91(1), pages 54-78, March.
    11. Miller, Merton H & Rock, Kevin, 1985. " Dividend Policy under Asymmetric Information," Journal of Finance, American Finance Association, vol. 40(4), pages 1031-51, September.
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    Cited by:
    1. Cheung, William & Lam, Keith S.K. & Tam, Lewis H.K., 2012. "Blockholding and market reactions to equity offerings in China," Pacific-Basin Finance Journal, Elsevier, vol. 20(3), pages 459-482.
    2. Bartram, Söhnke M. & Brown, Philip & How, Janice C.Y. & Verhoeven, Peter, 2007. "Agency Conflicts and Corporate Payout Policies: A Global Study," MPRA Paper 23244, University Library of Munich, Germany.
    3. Chin-Sheng Huang & Chun-Fan You, 2014. "Dividend-Yield Trading Strategies: Evidence from the Chinese Stock Market," International Journal of Economics and Financial Issues, Econjournals, vol. 4(2), pages 382-399.
    4. Bradford, William & Chen, Chao & Zhu, Song, 2013. "Cash dividend policy, corporate pyramids, and ownership structure: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 445-464.
    5. Peng, Fei & Kang, Lili & Jiang, Jun, 2011. "Selection and institutional shareholder activism in Chinese acquisitions," MPRA Paper 38701, University Library of Munich, Germany.

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