Economic policy uncertainty and dividend sustainability: new insight from emerging equity market of China

We examine the influence of Economic Policy Uncertainty (E.P.U.) on dividend sustainability – dividend termination and dividend initiation decision. Using a sample of 1,375 firms over the time span 2000–2015, our main result reveals that during high E.P.U. past dividend payers are more likely to terminate and past non-payers are less likely to initiate dividends. However, firms that rely more on internal finance (I.F.), generate high return on invested capital (R.O.I.C.) and state-owned enterprises (S.O.E.s) are less exposed to E.P.U. Therefore, negative (positive) effect of E.P.U. on firms’ dividend initiation (termination) decision is mitigated by considering firms’ heterogeneous characteristics. Results also show that firms having high asset growth, maturity, profitability, cash holdings and high firm value are more likely to initiate and less likely to terminate dividend during period of high E.P.U. In addition, effects of E.P.U. on dividend sustainability is higher for firms functioning in high marketised areas relative to low marketised groups. These findings are robust under different robustness check. Finding confirms that transparent and stable implementation of economic policies can improve sustainability of firm’s dividend policy.