Government debt, government ownership, and corporate cash dividends

This paper investigates the joint effect of government debt and government ownership on corporate dividends, using data on local government debt and A-share listed companies in China. We find that excessive local government debt leads to higher cash dividends among local state-owned enterprises (SOEs), indicating that under significant debt pressure, local governments rely on SOE cash dividends to address pressing fiscal challenges. The effect is more pronounced in regions where local governments have stronger control over SOEs and local debt ratios exceed the 100% risk warning threshold. Moreover, heavily indebted local governments prioritize alleviating urgent debt burdens to meet the central government's debt risk mitigation requirements and lower financing costs. We further show that SOEs accommodate these demands by cutting R&D expenditures and operating expenses while increasing bank debt. In fact, government debt is largely converted into SOE bank loans. Finally, we find that high SOE cash dividends enable local governments to scale back bond issuance for refinancing maturing implicit government debt and narrow the interest spread of newly issued government debt. Our findings have important implications for jurisdictions globally where the rule of law fails to protect minority shareholders against expropriation and dividend tunnelling.