Research On The Suitable Payout Ratio Of SOE In China

Since the birth of new China, the distribution of profits generated bystate-owned-enterprise (hereafter SOE) has gone through four stages which are (1)unified state control over income and expenditure (tong shou tong zhi),(2)decentralization of power and transfer of profits (fang quan rang li),(3) fully retained,and (4) paying dividends to investors. Now, there has been a consensus that SOEsshould pay cash dividends. But there are different opinions with regard to the suitablepayout ratio which must ensure both the sustainable development of SOEs and thereasonable profits of investors. The ratio should be determined on the basis of solidtheory, sufficient data analysis, and rigorous arguments. According to that researchlogic, we find that the suitable payout ratio should be40%to60%.The arrangement of the distertaion is as follows. The introductory part describesthe motivation, purpose, and the academic and practical value of the research. Theresearch logic, the arrangement of the chapters and the main contributions are alsointroduced.Chapter one to three provides the research premise which includes the literaturereview, the theoretical and institutional backgrouds with regard to dividend policies ofSOEs.Chapter one reviews the extant literature related to dividens policies of SOEs.According to the different conflicts of interests on the premise of informationasymmetry, we review three areas of dividend policy research. The signaling theoryintends to resolve the information asymmetry between extant investors and potentialinvestors. The principal-agent theory intends to resolve the information asymmetrybetween management and investors while the tunneling theory intends to resolve theinformation asymmetry between large shareholders and minority ones. The literaturereview provides us with more insights on the research logic.Chapter two examines the basic theories related to dividend policies of SOEsincluding theory of property rights, contract theory and theory of SOEs. The theory ofproperty rights is the premise of dividend policy. It is due to the separation of ownership and management that owners have the rights of residual claims and profitsharing according to the theory of property rights. Contract theories examine theoptimal payout ratio from different perspectives which include principal-agent theory,imcomplete contract theory and theory of transction costs. Theory of property rightsand contract theory also apply to SOEs which have the commonalities of firms.Meanwhile, there are significant differences between SOEs and other firms in thenature and structure of ownership. Thus we also discuss theories of SOEs related tothe particularities of SOEs.Chapter three introduces the institutional backgrounds. We make a briefintroduction to the four stages of the distribution relationship between SOEs and thegovernment, which are (1) unified state control over income and expenditure (tongshou tong zhi),(2) decentralization of power and transfer of profits (fang quan rangli),(3) fully retained, and (4) paying dividends to investors. The analysis ofinstitutional backgrounds helps us to better understand the optimal payout ratioconforming to the situation of our country.Chapter four, five and six are the data-analyzing parts, including the practices oflisting firms’ dividend policies, calculation of the optimal payout ratios and analyzingthe feasibility of the optimal ratios.Chapter four provides descriptive summaries of the practices of SOEs’(whichare ultimately owned by the central government, hereafter as CSOE) and all A-sharecompanies’ dividend policies. We compare the difference between CSOEs’and allA-share companies in the timing, types, and cash ratios of dividend paying.Chapter five calculates the optimal payout ratios. The sample includes CSOEsduring the period from2006to2009, comparing to a sample consisting all A-sharecompanies of the same period. Aiming at the maximization of accountingperformance and using the return to total assets as proxy variable, we calculate theoptimal payout ratios by multi-variate regressions. The results indicate that theoptimal payout ratios should be40%to60%.Chapter six analyzes the feasibility of the optimal payout ratios derived fromchapter five. International comparisons show that firms of many countires actuallyadopt a payout ratio between40%and60%, indicating that the ratio is suitable to different institutional backgrounds and feasibile in practice. Then a case analysis ofPetroChina Company Limited (hereafter as PetroChina) indicates that PetroChina haspromised to pay40%-50%of net profits as dividends at the IPO of H-shares in2001.Since the IPO of H-share, PetroChina has indeed paid out more than40%of its netprofits as dividends, even after the IPO of A-shares in2007. In contrast to ChinaPetroleum and Chemical Corporation (hereafter as SINOPEC), which is PetroChina’scounterpart and always pays less than PetroChina, PetroChina is more successful inprofitability and ability of growth. That also indicates the feasibility of our optimalpayout ratios in SOEs.The last chapter concludes our research. Based on our research, we conclude thatthe payout ratio of40%-60%is suitable and feasibile and the current mandatorypayout ratios have the potential to improve. We also recognize that only when theSOEs make sustainable profits can the increase of payout ratios make sense.Therefore our suggestions focus on two facets, which are (1) how to ensure thesustainable profits of SOEs, and (2) how to direct the payout ratios to the optimalones. To ensure the sustainable profits of SOEs, policy-makers must clearly positeSOEs with rigorous design of corresponding systems. The structure of coporategovernance needs to be improved and the broad of directors must be strengthened andstandardized. To direct the payout ratios to the optimal ones, we should strengthen thequality of financial information of SOEs and avoid earnings managements by SOEs.In the meanwhile, the target payout ratios should be set up and a definite timetableshould be laid down. We should also establish a flexible system with fixed andvariable payout ratios，moreover,the scope to pay dividend should be enlarged to allenterprises owned by the state.