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Does the semi-mandatory dividend policy affect firm innovation? Evidence from China's capital market

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  • Wang, Chenghao
  • Wu, Jieran
  • Zhou, Wenyu

Abstract

As a long-standing regulatory instrument in China's capital market, the semi-mandatory dividend policy—linking refinancing eligibility to a minimum dividend payout ratio—may have unintended consequences for firm innovation. Using panel data on A-share listed firms from 2000 to 2019, this study identifies the causal effect of reaching the exogenously imposed “dividend threshold” on innovation through a Bartik instrumental variable approach. We find that meeting the threshold significantly boosts innovation inputs (R&D) and outputs (patents), with results robust to alternative measures and specifications. The effect is strongest among private, R&D-intensive, and high-growth firms, as well as those in regions with greater banking competition or in strategic emerging industries. Mechanism tests show that reaching the threshold lowers agency costs, eases financing constraints, and complements disclosure, especially under low analyst coverage. Structural equation modelling (SEM) further confirms agency cost, analyst coverage and financing access as mediators. These findings suggest that dividend regulation aimed at investor protection may also promote innovation through improved governance and financial conditions.

Suggested Citation

  • Wang, Chenghao & Wu, Jieran & Zhou, Wenyu, 2025. "Does the semi-mandatory dividend policy affect firm innovation? Evidence from China's capital market," Pacific-Basin Finance Journal, Elsevier, vol. 94(C).
    • Handle: RePEc:eee:pacfin:v:94:y:2025:i:c:s0927538x25002744
    DOI: 10.1016/j.pacfin.2025.102937
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    References listed on IDEAS

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    JEL classification:

    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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