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Mandatory dividend policy and investment efficiency within state-owned business groups

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  • Kong, Dongmin
  • Ji, Mianmian
  • Liu, Lihua

Abstract

This research explores capital allocation efficiency in business groups when parent firms experience adverse shocks in their cash flow. Using the quasi-experimental method, this study finds 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) substantially improve investment efficiency. (2) A plausible mechanism is that the adverse cash shocks of parent CSOEs could facilitate the resource reallocation through related party transactions within a business group motivated by the listed CSOEs' investment opportunity instead of the parent CSOEs' tunneling behavior. (3) Our findings are more pronounced for firms with more serious agency problems. Overall, we provide the empirical evaluation of the economic consequences of mandatory dividend policy in terms of a firm's investment efficiency within a state-owned business group.

Suggested Citation

  • Kong, Dongmin & Ji, Mianmian & Liu, Lihua, 2023. "Mandatory dividend policy and investment efficiency within state-owned business groups," Pacific-Basin Finance Journal, Elsevier, vol. 77(C).
    • Handle: RePEc:eee:pacfin:v:77:y:2023:i:c:s0927538x22002050
    DOI: 10.1016/j.pacfin.2022.101910
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    More about this item

    Keywords

    Mandatory dividend policy; Investment efficiency; Business group; Related party transactions; Agency problem;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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