Nonlinear Relationships Between Dividends And Stock Prices In China’s Securities Market

With the development in the past two decades, China’s stock market has become one of the fastest growing capital markets in the world and plays an important role in the emerging market in a transitional economy. China’s securities market has prompted quickly in improving resource allocation efficiency and carrying out adjustment of economic structure and raising more capital from the public and maintaining the growth of the Chinese economy. China’s securities market has become an important platform for the construction of a socialist market economy system and makes it possible for the market-oriented economic reform in China. By the end of December2011, the Shanghai and Shenzhen Stock Exchanges hosted2,342listed companies including A-shares and B-shares. The market capitalization of listed companies reached214,758.10billion, equivalent to about64%of China’s GDP. Total shares of listed Chinese companies were29,746billion. The total turnover per day was1,728.06billion. The number of securities account was20259.2million. China’s securities market which were emerged under criticized have been able to reach a level of development that took many mature markets a hundred years to achieve.However, compared with more mature markets, Chinese capital market still lags behind in terms of market efficiency, legal systems, fiduciary trust, competitiveness of market participants and regulatory frameworks. China’s capital market should be further developed into fully-functioning and well-regulated market with improved efficiency and expanded market depth and width. A major issue is that some listed companies care more about financing, less about return to investor and pay inadequate dividend. The dividend policy isn’t consistent and often changes in the manner of dividend.This dissertation analyzes the relationships between dividend and stock price in China’s stock market with mathematical models and empirical methods under such a background. The results are useful to improve the efficiency of China’s stock markets resource allocation and to have fully recognizing the fundamental role of capital market in resources allocation and to have a significant impact on listed companies form sustain dividend policy and to have right invest culture. The main results are summarized as follows.(1)I describe the facts about the development of China’s stock market and dividend. In general there is a rapid growth in all respects such as total market value of shares, market value of floatable shares and market capitalization as percentage of GDP. Especially after the non-tradable share reform, the number of listed shares, the number of listed companies, total funds raised from shares, trading volume and the number of investor’s accounts opened continued to steady growth. But the turnover rate and PE are very high. China’s stock market is still largely characterized by short-term investment and a shortage of long-term investors. The ratio of payout dividend listed companies to total listed companies is more than those in the U S and Tai Wan but is less than those in the UK, Japan and Hong Kong. The ratio of dividend to earnings in China’s stock market is more than those in the U S but is less than those in the UK, Japan, Tai Wan and Hong Kong. The dividend yield is less than the others.(2) I research the theoretical models of dividends and stock prices. After a review of efficient-market hypothesis which is the basis of stock pricing theory, I compare a few method of testing efficient-market hypothesis and point out their shortcomings. Then I do some works about the process which stock price incorporate information. Under capacity Constraints, I set up a mathematical model about risk asset price which is considered information cost, corporate governance and the effort of supervision. Stock price is reflected partly information. At last, I revisit DeMarzo&Sannikov (2011) model and study a principal-agent setting in which output carries information about both effort and future profitability. In the optimal contract, young firms are financially constrained, do not pay dividends, and may be liquidated inefficiently. If the firm survives and accumulates sufficient financial slack, it initiates dividends. I also give some policy implication of this result.(3) I empirically examine the nonlinear Granger causality between stock prices and dividends using China’s securities market data. There is no linear causality between two series for China using the F test. Using the nonlinear Granger causality Diks-Panchenko test, I cannot reject the null hypothesis of no causality from stock price to dividend and reject the null hypothesis of no causality from dividend to stock price. I also compare the results with Chen&Shen (2009) results about the U.S., the UK, Japan and Germany. (4) I apply unit root test and nonlinear cointegration based ranks test to stock price and dividend of China’s securities market. I notice that there is a significant nonlinear relationship between two series, which is not found using linear cointegration test. This evidence shows that there is a long-term nonlinear equilibrium relationship.(5) Based on the mathematical model of dividends and stock prices volatility transition using continuous-time method which was developed by Robert Merton (1971), I apply multivariate GARCH model to make an empirical research of stock prices and dividends of China’s securities market. The findings show that there is a transition effect of volatility between dividends and stock prices. This transition effect exists for a long time. I regard that the source of this transition effect is that dividend and stock price are derivatives of corresponding corporate. Corporate volatility can transfer to dividend and stock price in the end.The main contributions of this dissertation are as follows.(1) According to the method which Shiller had developed in studied the U.S. securities market, I have got stock dividend month data listed in Shanghai stock exchange from1994to2010.I empirically examine the nonlinear Granger causality between stock prices and dividends using the nonlinear Granger causality Diks-Panchenko test. There is no linear causality between two series for China using the F test., I cannot reject the null hypothesis of no causality from stock price to dividend and reject the null hypothesis of no causality from dividend to stock price.(2) I adopt the unit root test and nonlinear cointegration based ranks test to investigate the price-dividend relationships of China’s securities market. I find that there is a significant nonlinear relationship between two series, which is not found using linear cointegration test. The empirical results show that there do exist a long-term nonlinear equilibrium relationship in China’s securities market.(5) There is no doubt that the use of continuous-time methods has turned out to be critical in financial economics. This dissertation uses continuous-time method to construct the relationship between dividends and stock prices volatility transition. I apply multivariate GARCH model to make an empirical research of stock prices and dividends of China’s securities market. The results show that there is a transition effect of volatility between dividends and stock prices. This transition effect exists for a long time. I think that the source of this transition effect is that dividend and stock price are derivatives of corresponding corporate. Decreasing the volatility of real economy could help relieve the excess volatility of stock price.