Ownership Structure, Control Chains, and Cash Dividend Policy:

[o1]  Evidence from China

William Bradford University of Washington, Seattle

Chao Chen* California State University, Northridge

Song Zhu Tsinghua University, Beijing

Abstract: China’s corporate sector is unique in many aspects. For example, most listed firms in the Shanghai and Shenzhen stock exchanges are carve-outs of state-owned enterprises in China, stock ownership is highly concentrated, and government bodies own a majority or controlling ownership of many publicly listed companies. Furthermore, a high percentage of the stocks of listed firms is not fully circulated in the Chinese stock market, but held by state-owned enterprises as non-tradable shares. This paper investigates the cash dividend policy of listed companies in China from the perspective of ownership structures and control chains that have evolved in China’s unique institutional and legal setting. The level of cash dividends per share is higher for companies ultimately controlled by non-state entities than for those controlled by the state, in particular, local government controlled firms. Local government controlled firms are more likely to pay less cash dividends because they have a greater incentive than central government controlled firms to support its listed companies. For companies ultimately controlled by the state, the longer the control chain, the higher the probability of cash dividends, the higher cash dividends per share and higher payout ratio. The opposite holds for firms that are not controlled by the state. The cash flow right is positively related to the probability of a cash dividend distribution, the level of the cash dividends, and the cash dividend payout ratio. The greater the divergence of the control rights and the cash flow rights, the higher the incentive for those with dominant control rights to seek rents from shareholders with minority control rights; in China the greater divergence leads to firms paying more dividends. 

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