There are three kinds of dividend policy for listed firms in China to choose.
The first one is “the bonus share” (hereinafter referred to as the “BS”) that is generally known as stock dividends. In fact, the BS simply transfers a portion of retained earnings to contributed capital. The second one is “the transference of additional paid-in capital to contributed capital” (hereinafter referred to as the “TA”).
As its name implies, the TA simply transfers a portion of additional paid-in capital to contributed capital. The last one is cash dividends.
Both the BS and the TA do not reduce or increase a firm’s assets and equity.
They simply affect the relative components of equity. On the contrary, cash dividends do pay cash to shareholders. A firm’s assets and equity decrease by the amount of cash dividends, and a firm’s cash flow and potential investment in the firm’s growth are surely curtailed by cash dividend payment. Thus, it is reasonable to briefly conclude that cash dividends have a direct and practical influence on a firm’s long-run operation than the BS and the TA do.
Fama and French (2001) point out that, regardless of the earning level, the proportion of all listed firms in the U.S. that paid cash dividends has fallen dramatically from 80% to 20% during the period of the 1960s to 1990s. As data in Table 1 show, publicly traded firms in China echoed this “dividend-disappearing trend” mentioned in Fama and French (2001) over the 1990s. The ratio of cash dividend paying firms fell from 97.3% in 1993 to 36.8% in 1999. Nevertheless, the proportion of cash dividend paying firms rebounded greatly in 2000.
It would be intuitional to attribute this dramatic change to the announcement of two administrative rules about new share offerings on March 28 and May 11, 2001.
First, “Administration Rules for New Shares Offering of the Listed Firms” were declared on March 28, 2001. The rules require the lead underwriter to mark out in the underwriting investigation reports any firm that did not have any cash dividend in the past three years and any firm’s board of directors who did not reasonably explain why they do not pay cash dividends. Afterward, on May 11, 2001, “The Public Offering Review Committee of China Securities Regulatory Commission Concerning Guidance on New Shares Offering Check and Commission of Listed Firms” was declared and executed. It demands the Public Offering Review Committee to concentrate on the circumstances of a firm’s cash dividend payment in the past three years, and to decide independently if such a circumstance will affect the new share offering of a listed firm when the committee is checking and admitting the new share
offering application from this listed firm.
Although both rules do not explicitly forbid those firms that do not pay cash dividends from offering new shares, its rational is for managers in publicly traded firms to figure out that these two rules are set up to implicitly require listed firms to pay cash back to shareholders so as to strengthen the shareholder protection. The Government hopes the listed firms retain less cash flow and to return the cash to their shareholders. Thus, managers in publicly traded firms should strike a balance between an absence of financial flexibility in raising funds by issuing new shares and a shortage of funds for further growth resulting from distributing cash out. Once the firms pay cash dividends to obtain long-run financial flexibility for issuing new shares, a short-run financial resource (cash dividend payment) is the sacrifice. These two rules are not really adequate, because the firms that pay cash dividends to get the chance of offering new shares to raise funds may possibly be the ones deficient in money. The long-term prospect of a firm may possibly be harmed if managers are obedient to these two regulatory rules. However, as the proportion of the firms paying cash dividends has sky-rocketed, most managers have chosen to resign themselves to these two rules.
Table 1 provides detailed information about the trends of the BS and TA. It is obvious that the proportion of BS paying firms fell steadily throughout the whole period. On the other hand, the proportion of firms paying TA attained a maximum in 1996 and then declined. The ratio then kept fluctuating between 11% and 17% in recent years. Thus, comparing to cash dividends, BS and TA are no longer preferred forms of dividend policy in China nowadays.
Listed firms in China have a unique share structure. The share structure of a listed firm in China is divided into two parts: one is floating shares, and the other is non-floating shares. This separation of share structure is known as “the Split Share
Structure”. The Split Share Structure has several features. First, non-floating shares are non-tradable in capital markets, but floating shares are tradable. In other words, the incomes of non-floating shareholders come only from cash dividends, but floating shareholders can profit both through capital gains and cash dividends. Next, the non-floating shares are usually held by issuers of firms, the institutional investors, and the Chinese government, but the floating shares are held by the public.
The proportion of non-floating shares is much higher than that of floating shares. In fact, according to the share structure data from the website of China Securities Regulatory Commission, which is summarized in Table 2, the proportion of non-floating shares for all publicly traded firms is always higher than 60%. Thus, the board of directors is usually dominated by non-floating shareholders. Finally, the holding cost of non-floating shareholders approximates the par value (RMB 1) which is much lower than that of floating-share investors.
The existence of the Split Share Structure leads to severe corporate governance problems. With a view to carrying out “the Guidelines on Promoting Reform, Opening-up and Steady Development of China's Capital Market”, floating the non-floating shares of A-share listed companies, balancing the interests of shareholders, and addressing the problem of listed companies’ split share structure,
“the Pilot Reform of Listed Companies Split Share Structure” was formally initiated in 2005. Before the reform of the share structure of listed firms is completed, the controlling non-floating shareholders may distribute cash dividends to themselves.
The reason why they tend to do so is as follows. First, because of the relatively lower holding costs, the cash dividend distribution will benefit the non-floating shareholders with a much higher cash dividend yield. Second, the cash dividend payment is the only method for which non-floating shareholders can realize incomes.
To sum up, we think that the controlling shareholders (usually non-floating
shareholders) may make dividend policy decisions that hurt the maximum interest of floating shareholders.
Based on the distribution data of cash dividends available on the CSMAR (China Stock Market Accounting Research) which is provided by the GTA Information Technology Limited Company, we calculate and summarize detailed descriptive statistics of the cash dividends of all listed A-share stocks in the Shanghai Stock Exchange and the Shenzhen Stock Exchange in Table 3. As we can see, the cash dividend payment of these two markets has similar features which can be summarized as follows. First, the proportion of firms that paid cash dividends rose dramatically in 2000, and this phenomenon matched the trend of cash dividend distribution just mentioned above. The ratio then fell back gradually in the succeeding years. Second, average cash dividends per share decreased sharply in 2000. Nevertheless, after average cash dividends per share fell to the minimum in 2001, it rebounded back in recent years. Moreover, as the enlarging standard deviation of cash dividends per share shows, the distribution of cash dividends is getting more and more diverse. Last but not least, the distribution of cash dividends is not only more peaked than normal distribution, but also right skewed.
This paper further provides some comparative descriptive statistics about the financial data of listed firms paying cash dividends (hereinafter referred to as “payers”) and of listed firms not paying cash dividends (hereinafter referred to as “non-payers”) in the Shanghai Stock Exchange and the Shenzhen Stock Exchange, respectively, and this information is summarized in Table 4. Referring to Table 4, we can easily conclude that payers tend to be large-sized, value-oriented, low-leveraged, high- operating-performance, and high-profit firms. The share structure of payers is inclined to be more centralized and more state-owned oriented than that of non-payers.