Mandatory dividend policy and perk consumption: Evidence from state-owned business groups in China

This study examines perk consumption in a business group when unlisted parent firms experience an adverse shock in their financial conditions. We exploit a quasi-experiment in China, the mandatory dividend policy of a state-owned business group starting in 2007, to conduct difference-in-differences estimation. We find that: (1) When parent central state-owned enterprises (parent CSOEs) are required to pay dividends to the government, their group-affiliated listed central state-owned enterprises (listed CSOEs) experience a substantial decrease in perk expenditures. (2) Further analyses show that the association between the mandatory dividend policy and perks is stronger in firms with a higher level of resource dependence on the business group and firms within the business group with higher resource allocation ability. (3) Our findings are more pronounced for firms with better internal and external governance. Overall, we provide the empirical evaluation of the economic consequences of the mandatory dividend policy in terms of a firm’s perks within a state-owned business group.