IDEAS home Printed from https://ideas.repec.org/a/sae/ausman/v41y2016i3p508-537.html
   My bibliography  Save this article

Why do firms pay stock dividends: Is it just a stock split?

Author

Listed:
  • Xi He

    (Research School of Finance, Actuarial Studies & Applied Statistics, The Australian National University, Australia)

  • Mingsheng Li

    (College of Business Administration, Bowling Green State University, USA)

  • Jing Shi

    (International Institute for Financial Studies, Jiangxi University of Finance and Economics, Jiangxi, China; School of Economics, Finance and Marketing, RMIT College of Business, RMIT University, Australia)

  • Garry Twite

    (Department of Finance, University of Melbourne, Australia)

Abstract

This paper examines why firms choose to pay stock dividends. Using a sample of listed Chinese firms we find that older, more profitable firms with lower leverage, higher levels of retained earnings, private ownership prior to listing, that invest more in fixed assets and operate in regions with lower shareholder protection are more likely to pay stock dividends. Consistent with stock dividends substituting for stock splits, our evidence indicates that the initiation of a stock dividend is associated with a significant positive market reaction and increased analyst following. These results suggest that firms use stock dividends to attract analysts’ attention. In addition, the positive announcement effect for stock dividends increases with the size of the split factor, suggesting that management use stock dividends to keep the firm’s stock price within its acceptable trading range.

Suggested Citation

  • Xi He & Mingsheng Li & Jing Shi & Garry Twite, 2016. "Why do firms pay stock dividends: Is it just a stock split?," Australian Journal of Management, Australian School of Business, vol. 41(3), pages 508-537, August.
    • Handle: RePEc:sae:ausman:v:41:y:2016:i:3:p:508-537
    DOI: 10.1177/0312896214553858
    as

    Download full text from publisher

    File URL: https://journals.sagepub.com/doi/10.1177/0312896214553858
    Download Restriction: no
    File URL: https://libkey.io/10.1177/0312896214553858?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Bai, Chong-En & Liu, Qiao & Lu, Joe & Song, Frank M. & Zhang, Junxi, 2004. "Corporate governance and market valuation in China," Journal of Comparative Economics, Elsevier, vol. 32(4), pages 599-616, December.
    2. Lakonishok, Josef & Lev, Baruch, 1987. "Stock Splits and Stock Dividends: Why, Who, and When," Journal of Finance, American Finance Association, vol. 42(4), pages 913-932, September.
    3. Fan, Joseph P.H. & Wong, T.J. & Zhang, Tianyu, 2007. "Politically connected CEOs, corporate governance, and Post-IPO performance of China's newly partially privatized firms," Journal of Financial Economics, Elsevier, vol. 84(2), pages 330-357, May.
    4. Yan, Wu & Powell, John G. & Shi, Jing & Xu, Wei, 2007. "Chinese stock market cyclical regimes: 1991-2006," Economics Letters, Elsevier, vol. 97(3), pages 235-239, December.
    5. Kao, Lanfeng & Chen, Anlin, 2013. "How product market competition affects dividend payments in a weak investor protection economy: Evidence from Taiwan," Pacific-Basin Finance Journal, Elsevier, vol. 25(C), pages 21-39.
    6. Rafael La Porta & Florencio Lopez‐de‐Silanes & Andrei Shleifer & Robert W. Vishny, 2000. "Agency Problems and Dividend Policies around the World," Journal of Finance, American Finance Association, vol. 55(1), pages 1-33, February.
    7. Copeland, Thomas E, 1979. "Liquidity Changes Following Stock Splits," Journal of Finance, American Finance Association, vol. 34(1), pages 115-141, March.
    8. Calomiris, Charles W. & Fisman, Raymond & Wang, Yongxiang, 2010. "Profiting from government stakes in a command economy: Evidence from Chinese asset sales," Journal of Financial Economics, Elsevier, vol. 96(3), pages 399-412, June.
    9. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    10. Louis T. W. Cheng & Hung‐Gay Fung & Tak Yan Leung, 2009. "Dividend preference of tradable‐share and non‐tradable‐share holders in Mainland China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 49(2), pages 291-316, June.
    11. repec:bla:jfinan:v:59:y:2004:i:3:p:1125-1165 is not listed on IDEAS
    12. Hongbin Cai & Hanming Fang & Lixin Colin Xu, 2011. "Eat, Drink, Firms, Government: An Investigation of Corruption from the Entertainment and Travel Costs of Chinese Firms," Journal of Law and Economics, University of Chicago Press, vol. 54(1), pages 55-78.
    13. David Aboody & Baruch Lev, 2000. "Information Asymmetry, R&D, and Insider Gains," Journal of Finance, American Finance Association, vol. 55(6), pages 2747-2766, December.
    14. John, Kose & Knyazeva, Anzhela & Knyazeva, Diana, 2011. "Does geography matter? Firm location and corporate payout policy," Journal of Financial Economics, Elsevier, vol. 101(3), pages 533-551, September.
    15. Miller, Merton H & Rock, Kevin, 1985. "Dividend Policy under Asymmetric Information," Journal of Finance, American Finance Association, vol. 40(4), pages 1031-1051, September.
    16. Lin, Justin Yifu & Cai, Fang & Li, Zhou, 1998. "Competition, Policy Burdens, and State-Owned Enterprise Reform," American Economic Review, American Economic Association, vol. 88(2), pages 422-427, May.
    17. Grinblatt, Mark S. & Masulis, Ronald W. & Titman, Sheridan, 1984. "The valuation effects of stock splits and stock dividends," Journal of Financial Economics, Elsevier, vol. 13(4), pages 461-490, December.
    18. Andres Almazan & Sanjay Banerji & Adolfo De Motta, 2008. "Attracting Attention: Cheap Managerial Talk and Costly Market Monitoring," Journal of Finance, American Finance Association, vol. 63(3), pages 1399-1436, June.
    19. Jeffrey J. Coulton & Caitlin Ruddock, 2011. "Corporate payout policy in Australia and a test of the life‐cycle theory," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 51(2), pages 381-407, June.
    20. Brennan, Michael J & Hughes, Patricia J, 1991. "Stock Prices and the Supply of Information," Journal of Finance, American Finance Association, vol. 46(5), pages 1665-1691, December.
    21. Mitton, Todd, 2004. "Corporate governance and dividend policy in emerging markets," Emerging Markets Review, Elsevier, vol. 5(4), pages 409-426, December.
    22. Michaely, Roni & Thaler, Richard H & Womack, Kent L, 1995. "Price Reactions to Dividend Initiations and Omissions: Overreaction or Drift?," Journal of Finance, American Finance Association, vol. 50(2), pages 573-608, June.
    23. Varouj Aivazian & Laurence Booth & Sean Cleary, 2003. "Do Emerging Market Firms Follow Different Dividend Policies From U.S. Firms?," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 26(3), pages 371-387, September.
    24. Easterbrook, Frank H, 1984. "Two Agency-Cost Explanations of Dividends," American Economic Review, American Economic Association, vol. 74(4), pages 650-659, September.
    25. Gao, Lei & Kling, Gerhard, 2008. "Corporate governance and tunneling: Empirical evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 16(5), pages 591-605, November.
    26. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June.
    27. McNichols, Maureen & Dravid, Ajay, 1990. "Stock Dividends, Stock Splits, and Signaling," Journal of Finance, American Finance Association, vol. 45(3), pages 857-879, July.
    28. Wen He, 2012. "Agency problems, product market competition and dividend policies in Japan," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 52(3), pages 873-901, September.
    29. Sudipto Bhattacharya, 1979. "Imperfect Information, Dividend Policy, and "The Bird in the Hand" Fallacy," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 259-270, Spring.
    30. Chen, Donghua & Jian, Ming & Xu, Ming, 2009. "Dividends for tunneling in a regulated economy: The case of China," Pacific-Basin Finance Journal, Elsevier, vol. 17(2), pages 209-223, April.
    31. Lin, Ji-Chai & Singh, Ajai K. & Yu, Wen, 2009. "Stock splits, trading continuity, and the cost of equity capital," Journal of Financial Economics, Elsevier, vol. 93(3), pages 474-489, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Zhong He & Xiaoyan Chen & Wei Huang & Rulu Pan & Jing Shi & Tom Smith, 2016. "External finance and dividend policy: a twist by financial constraints," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 56(4), pages 935-959, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Paul McGuinness & Kevin Lam & João Vieito, 2015. "Gender and other major board characteristics in China: Explaining corporate dividend policy and governance," Asia Pacific Journal of Management, Springer, vol. 32(4), pages 989-1038, December.
    2. Hussein Abedi Shamsabadi & Byung-Seong Min & Richard Chung, 2016. "Corporate governance and dividend strategy: lessons from Australia," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 12(5), pages 583-610, October.
    3. Li, Fengfei & Lin, Ji-Chai & Lin, Tse-Chun & Shang, Longfei, 2023. "Behavioral bias, distorted stock prices, and stock splits," Journal of Banking & Finance, Elsevier, vol. 154(C).
    4. Basharat Khan & Qiujun Zhao & Amjad Iqbal & Irfan Ullah & Shahab Aziz, 2022. "Internal Dynamics of Dividend Policy in East-Asia: A Comparative Study of Japan and South Korea," SAGE Open, , vol. 12(2), pages 21582440221, April.
    5. David, Thomas & Ginglinger, Edith, 2016. "When cutting dividends is not bad news: The case of optional stock dividends," Journal of Corporate Finance, Elsevier, vol. 40(C), pages 174-191.
    6. James, Hui & Benson, Bradley W. & Wu, Chen (Ken), 2017. "Does CEO ownership affect payout policy? Evidence from using CEO scaled wealth-performance sensitivity," The Quarterly Review of Economics and Finance, Elsevier, vol. 65(C), pages 328-345.
    7. Kuo, Nan-Ting & Lee, Cheng-Few, 2013. "Effects of dividend tax and signaling on firm valuation: Evidence from taxable stock dividend announcements," Pacific-Basin Finance Journal, Elsevier, vol. 25(C), pages 157-180.
    8. Wu, Manhwa & Ni, Yensen & Huang, Paoyu, 2020. "Dividend payouts and family-controlled firms—The effect of culture on business," The Quarterly Review of Economics and Finance, Elsevier, vol. 75(C), pages 221-228.
    9. Hasan, Mostafa Monzur & Uddin, Mohammad Riaz, 2022. "Do intangibles matter for corporate policies? Evidence from organization capital and corporate payout choices," Journal of Banking & Finance, Elsevier, vol. 135(C).
    10. Darakhshan Younis & Attiya Yasmin Javid, 2014. "Market Imperfections and Dividend Policy Decisions of Manufacturing Sector of Pakistan," PIDE-Working Papers 2014:99, Pakistan Institute of Development Economics.
    11. Nickolaos Travlos & Lenos Trigeorgis & Nikos Vafeas, 2001. "Shareholder Wealth Effects of Dividend Policy Changes in an Emerging Stock Market: The Case of Cyprus," Multinational Finance Journal, Multinational Finance Journal, vol. 5(2), pages 87-112, June.
    12. Qin, Wei & Liang, Quanxi & Jiao, Yan & Lu, Meiting & Shan, Yaowen, 2022. "Social trust and dividend payouts: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 72(C).
    13. Alpa Dhanani, 2005. "Corporate Dividend Policy: The Views of British Financial Managers," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(7‐8), pages 1625-1672, September.
    14. Nan-Ting Kuo, 2013. "Dividend tax signaling and the pricing of future earnings: a case of taxable stock dividends," Review of Quantitative Finance and Accounting, Springer, vol. 40(3), pages 539-570, April.
    15. Renneboog, L.D.R. & Trojanowski, G., 2005. "Patterns in Payout Policy and Payout Channel Choice of UK Firms in the 1990s," Discussion Paper 2005-002, Tilburg University, Tilburg Law and Economic Center.
    16. Francis, Bill B. & Samuel, Gilna & Wu, Qiang, 2023. "The impact of short selling on dividend smoothing," Journal of Financial Stability, Elsevier, vol. 65(C).
    17. Ouyang, Puman & Zhong, Ligang, 2023. "Asset redeployability and dividend payout policy," The Quarterly Review of Economics and Finance, Elsevier, vol. 90(C), pages 91-105.
    18. Muhammad Sadiq Shahid, PhD & Dr.Faid Gul & Muhammad Rizwan & Muhammad Hassan Bucha, PhD, 2016. "Ownership Structure, Board Size, Board Composition And Dividend Policy: New Evidence From Two Emerging Markets," IBT Journal of Business Studies (JBS), Ilma University, Faculty of Management Science, vol. 12(2), pages 25-36.
    19. Guo, Fang & Zhou, Kaiguo & Cai, Jinghan, 2008. "Stock splits, liquidity, and information asymmetry--An empirical study on Tokyo Stock Exchange," Journal of the Japanese and International Economies, Elsevier, vol. 22(3), pages 417-438, September.
    20. Khamis H. Al-Yahyaee, 2014. "Frequency and Motives for Stock Dividends in a Unique Environment," International Review of Finance, International Review of Finance Ltd., vol. 14(2), pages 295-318, June.

    More about this item

    Keywords

    Dividend policy; stock dividend; stock split;
    All these keywords.

    JEL classification:

    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sae:ausman:v:41:y:2016:i:3:p:508-537. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: SAGE Publications (email available below). General contact details of provider: http://www.agsm.edu.au .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.