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Information content of dividends: a case of an emerging financial market

Author

Listed:
  • Reza H. Chowdhury
  • Min Maung
  • Jenny Zhang

Abstract

Purpose - – The purpose of this paper is to examine the signaling and free cash flow hypotheses of dividends in the context of an emerging financial market. Design/methodology/approach - – The authors use fundamental financial information of Chinese companies listed in the Shenzhen and Shanghai stock exchanges. They examine the impact of cash dividend payments on future profitability of individual firms with and without controlling for non-linearity in their earnings to test the signaling hypothesis. They also determine the characteristics of dividend paying firms to examine the free cash flow hypothesis. Findings - – It was found that while dividend increases by publicly listed Chinese firms are followed by increases in earnings in two subsequent years, such relationship does not exist in the case of dividend decreases. However, under the assumption of non-linearity of earnings, it was found that neither dividend increases nor dividend decreases convey any valuable information about future changes in earnings of Chinese firms. Further, it was found that firms with high cash holdings, large profitability and high managerial efficiency are likely to pay dividends. The authors therefore conclude that announcements of cash dividend payments do not signal future performance but indicate good governance practices of publicly traded firms in China. Originality/value - – This evidence is critical for potential foreign investors in their portfolio investment decisions and for regulators in determining an efficient measure of corporate disclosure in China.

Suggested Citation

  • Reza H. Chowdhury & Min Maung & Jenny Zhang, 2014. "Information content of dividends: a case of an emerging financial market," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 31(3), pages 272-290, July.
  • Handle: RePEc:eme:sefpps:v:31:y:2014:i:3:p:272-290
    DOI: 10.1108/SEF-04-2013-0046
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    Citations

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    Cited by:

    1. Małgorzata Snarska & Tomasz K. Wisniewski & Andrzej Zygula, 2020. "Are Emerging Markets Efficient? Evidence from Informational Content of Dividend Changes in Polish Stock Market," European Research Studies Journal, European Research Studies Journal, vol. 0(4), pages 687-717.
    2. Liu, Yen-Yu & Lee, Pin-Sheng, 2022. "Market responses to cash dividends distributed from capital reserves," Finance Research Letters, Elsevier, vol. 46(PB).
    3. Geetanjali Pinto & Shailesh Rastogi, 2019. "Sectoral Analysis of Factors Influencing Dividend Policy: Case of an Emerging Financial Market," JRFM, MDPI, vol. 12(3), pages 1-18, June.

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