Private placement and abnormal corporate payouts: evidence from large stock dividends

Dividends should be used as the way firms reward their investors, but in the Chinese stock market, large stock dividends have been criticised for several years. In this paper, through a case study and large-sample empirical tests, we find that large stock dividends are used to cater to investors participating in a firm’s private placement. Further empirical tests document that during the unlocking periods of privately issued new shares, firms are more likely to pay large stock dividends, especially when outside private placement investors are able to sell their shares. Additional tests reveal that private placement investors do make stock sales after receiving large stock dividends. Furthermore, firms undertaking large stock dividends after private placement have more frequent connected-party transactions, are more tunnelled by other receivables and have more aggressive earnings management and lower investment efficiencies, implying that the governance role of private placement is largely attenuated because of large stock dividends. Large stock dividends after private placement are also shown to be opportunistic behaviour and irrelevant to future performance in our study. Overall, the large stock dividends result in wealth transferring between insiders and ordinary investors, and further reduce the efficiency of resource allocation in the Chinese capital market. From the results we insist that regulators should encourage cash dividends and keep a close eye on potential abuse through large stock dividends.