The Economic Consequence Of IPO Cash Dividend Commitment

Cash dividend is one major way that firms reward their investors.A long-term and stable dividend policy is one sign of a mature capital market.Over the past years,many listed firms do not reward investors by adopting stable and sound dividend policy.On November 9th 2011,China's Securities Regulatory Commission(CSRC)requires the "Initial Public Offerings"(IPO)companies to make the cash dividend commitment and disclosure the proportions and conditions of cash dividend in the prospectus.The purpose of the new regulation is to increase dividend reward to investors.Higher level of investor protection not only signals better investor protection but also raise resource allocation efficiency.This new policy allows both government regulation and firms' discretions,and will create sound basic institutions for future IPO registration-based system reform.CSRC's new policy is an innovative regulation,so there is no experiment that we can learn.Since China adopts "approval-based system",IPO quota is highly regulated.Dividend commitment that IPO candidates make will affect IPO quota allocation.Besides this,cash dividend commitment signals firm value,so will affect underpring rate.Finally,firms will be constrained by such commitment after get listed,so its behaviors will change.What are the implementing effects of the new policy is an important question.We address the above three questions by providing corresponding empirical evidence.This paper consists of eight chapters.Below are outlines of each chapter:Chapter 1 is the introduction which briefly introduces the research questions,institutional background,ideas and potential contributions.Chapter 2 summarizes related literature and provides comments on cash dividend theory,on resource allocation efficiency by market and government,on accounting conservatism,and on tunneling behavior.Chapter 3 introduces institutional background on mandatory cash dividend policy.By analyzing history of cash dividend policy in China capital market,I first point out characteristics of cash dividend policy in China stock market,then introduce and evaluate the implemented policies over the past yearsChapter 4 studies cash dividend commitment policy and resource allocation efficiency.This chapter investigate whether cash dividend commitment affect CSRC and investors' resource allocation behavior,then compare accounting performance of firms that make different cash dividend commitment.Chapter 5 investigates whether cash dividend commitment affects level of cash holding and the propensity to overinvest,so provide empirical evidence on the association between cash dividend commitment and firm behaviors.Chapter 6 investigates whether cash dividend commitment affects block shareholders' tunneling behavior.Specifically,I proxy tunneling behaviors using related party earnings management and accrue based earnings management.Chapter 7 investigates whether cash dividend commitment affects accounting conservatism.Chapter 8 sums up the research findings of this paper,the caveats about this research and point out the direction for further research.This paper draws the following conclusions:1.By analyzing characteristics of dividend commitment,I find that the new policy increase the proportion of firms that make high cash payment,and this is good for the concept of value investment.2.The results show that both CSRC and investors favor IPO firms that commit high dividend payout which have better post-IPO performance.The result indicates that dividend payout commitment ratio signals firm value,and the new policy increases resource allocation efficiency.The results also show find that in the group of IPO firms that commit high dividend payout,firms that make unconditional commitment to pay cash dividends have better post-IPO performance and are less underpriced.But these firms are not more likely to be approved by CSRC.This indicates that dividend commitments conditions also signal firm value.3.The results show that firms that make high cash dividend commitment hold higher level of cash assets and are less likely to overinvest.This results show that cash dividend commitment significantly affect firms' behaviors.Specifically firms make high cash dividend commitment ratio bear more financing constrains and need to hold more cash for liquidation purpose.These firms also have constrained free cash flow and therefore have low propensity to overinvest.4.The results show that firms that make higher cash dividend commitment are more likely to manage earnings downward and are less likely to prop up earnings by discounting sales or by crediting sales.These firms are more likely to transferring profits back to parent firms by related party purchasing.The results show that overall positive effects of cash dividend commitment institution are destroyed by insufficient regulation on related party purchasing and earnings management.5.The results show that firms that make higher cash dividend commitment adopt more conserved accounting policy.So cash dividend commitment institution increases informativeness of accounting information.This paper explores the economic consequence of cash dividend commitment institution,below are main innovations and contributions of this paper:1.This paper offers a new approach to analyzing characteristics of cash dividend commitment to scholars who will do further research.2.The Third Plenary Session of 18th CPC Central Committee stipulate that multi-level capital market system should be developed.This means that market will be the driven force of deciding firm value.The results show that market force is more efficient in estimating firm value than CSRC.3.This paper investigates several aspects of firms' behavior to evaluate effects of enforcement,so is a comprehensive analysis of cash dividend commitment policy.4.This paper use economic and finance theories to explain the working mechanism,so provide empirical support to these theories.