How do talented managers view dividend policy? Further evidence from Chinese equity market

Purpose - The purpose of this paper is to examine the importance of market imperfection, namely, variation in managerial ability (MA), on dividend policy in China. The authors focus on the Chinese market as it is dominated by state-owned enterprises and test whether the association between MA and dividend policy varies systematically with the degree of state ownership. Design/methodology/approach - To measure MA, this study exploits a novel measure developed by Demerjianet al.(2012) to estimate how efficiently manager utilizes firm’s resources. Manager efficiency is defined in terms of output a manager produces based on inputs available within firm. Findings - The authors find that relationship between MA and dividend policy is primarily driven by non-state own enterprises compare to state own enterprises, more prevalent for financially unconstrained firms with strong balance sheet and more pronounced under high marketized groups as compare to low marketized groups. These finding are robust under battery of robustness checks. This research adds new insight for the policy makers and investors to pay more attention on MA. Practical implications - This research adds new insight for the policy makers and investors to pay more attention on MA. Originality/value - This study augments the dividend policy literature by relaxing perfect capital market assumption of Miller and Modigliani, and neo-classic view of firms by incorporating a new novel factor – variation in MA – and applies it to the emerging market of China.