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Does quasi-mandatory dividend rule restrain overinvestment?

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  • Wei, Xiaoquan
  • Wang, Chunfei
  • Guo, Yunnan

Abstract

We study the impact of a quasi-mandatory dividend rule on restraining corporate overinvestment in China. In 2008, the Chinese government adopted a regulation mandating that publicly listed firms pay out a minimum of 30% of their average earnings over the preceding 3 years as cash dividends before the firms can apply for SEOs. The 30% Rule in China is unique in the sense that it applies only to firms applying for SEOs. Our findings suggest that firms paying small dividends (but not meeting the 30% Rule) better restrain their overinvestment after the 30% Rule than the control firms. The 30% Rule, while meant to encourage firms to pay more dividends, pushes small-dividend firms to improve their investment efficiency by lowering the extent of overinvestment. For firms paying no dividends, we find that, after implementation of the 30% Rule, their overinvestment increases. Finally, we document that the impact of the 30% Rule on restraining overinvestment among small-dividend firms is attenuated if they have bad agency problems. Our findings offer policy implications for other emerging markets considering adopting mandatory dividend regulations.

Suggested Citation

  • Wei, Xiaoquan & Wang, Chunfei & Guo, Yunnan, 2019. "Does quasi-mandatory dividend rule restrain overinvestment?," International Review of Economics & Finance, Elsevier, vol. 63(C), pages 4-23.
    • Handle: RePEc:eee:reveco:v:63:y:2019:i:c:p:4-23
    DOI: 10.1016/j.iref.2018.07.001
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    More about this item

    Keywords

    Mandatory dividend rule; Agency problem; Overinvestment;
    All these keywords.

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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