Liquidity, Ownership Structure and Dividend Policy: Evidence from China’s Split Share Structure Reform

Since ownership structure has played an increasingly significant role in corporate governance, considerable importance has been attached to the relationship between firm’s corporate ownership structure and its dividend policy. In this study, the Split Share Structure Reform that allowed previously non-tradable shares to be freely tradable in the secondary market and were implemented in batches could be treated as an exogenous shock for stock liquidity and thus a diff-in-diff method could be adopted as the natural experiment for the relationship between ownership structure and dividend policy change due to the stock liquidity increase in Chinese stock market. We find that the average dividend of Chinese-listed firms increased after the reform. Additionally, firms with multi relative controlling shareholders and firms with only minority shareholders experienced a significant increase in dividend while firms with absolutely controlling shareholder suffered a significant dividend reduction. The mechanism for the influence of stock liquidity increase on dividend policy change for firms with above three ownership structures could be explained by the internal fund channel, the agency problem channel and the wealth expropriation channel separately. JEL classification numbers: G18, G32, G35.