Research On The Economic Consequences Of The Turning Over Of State-owned Capital Gains

This study investigates the impact of the turning over of state-owned capital gains from unlisted parent central state-owned enterprises(hereafter parent CSOEs)on the behavior of the group-affiliated listed central state-owned enterprises(hereafter listed CSOEs)controlled by those parent CSOEs and the specific mechanism of the impact from four perspectives: corporate cash holdings,the perk consumption of management,corporate mergers and acquisitions,and investment efficiency.Existing studies are mainly based on the possible impact of the voluntary and semi-mandatory dividend policy of state-owned listed companies on the company itself that distributes dividends.However,few studies explore the impact of mandatory dividend policy of the parent firm of the business group on the listed firms affiliated to the business group controlled by those parent firms based on the internal capital market.The article treats a series of files such as the “Interim Measures for the Administration of the Collection of State-owned Capital Gains by Central Enterprises” issued on December 11,2007 and the follow-up documents issued by the Ministry of Finance and the State-owned Assets Supervision and Administration Commission as mandatory dividend policy.The mandatory dividend policy stipulates the list of central state-owned enterprises that need to distribute dividends and the corresponding proportion of dividends to the state each year.We use this mandatory dividend policy as an exogenous event to explore the listed CSOEs’ behavior when their parent CSOEs of the business group are mandatorily required to pay dividend to the governments.Based on agency theory,free cash flow theory,dividend policy theory and internal capital market theory,combined with Chinese institutional background and relevant research on the economic consequences of dividend distribution,relevant research on the efficiency of resource allocation in business group,determinants of perk consumption,mergers and acquisitions as well as investment efficiency,we investigate the impact of the mandatory dividend policy of the parent firms of the business group on the behavior of the listed firms in the group controlled by those parent firms.Specifically,this study firstly explores the impact of state-owned capital gains turned over by the parent CSOEs on the listed CSOEs’ cash holdings.On this basis,we further examine the impact of negative cash flow shock of the parent CSOEs on the listed CSOEs’ perk consumption and investment behavior(i.e.,corporate mergers and acquisitions and investment efficiency)and has drawn the following main conclusions:(1)The implement of the mandatory dividend policy of the parent CSOEs would significantly reduce listed CSOEs’ cash holdings.The mechanism test results show that when the parent CSOEs encounter a negative cash flow shock,the business group would not provide funds to the parent CSOEs by increasing the proportion of cash dividends of the listed CSOEs in the group.On the contrary,the business group transfers funds from the listed CSOEs to the parent CSOEs through related lending.Moreover,we find that the implementation of the mandatory dividend policy will encourage the parent CSOEs to further occupy the funds of the listed CSOEs through other receivables.(2)When parent CSOEs are mandatorily required to pay dividend to the governments,the listed CSOEs would experience a substantial decrease in perk expenditures.This effect mainly exists in firms with higher level of financing constraints,lower level of net cash flow from operating activities,higher level of occupancy of controlling shareholders,and lower level of government subsidies,indicating that the adverse cash shock for parent CSOEs could reduce perk consumption through shrinking the resources under management control and alleviating the agency problems.We further find that the impact is more pronounced for firms with better internal and external governance.Finally,this chapter also discusses the impact of the mandatory dividend policy on R&D expenditures,as well as the moderating effect of perk consumption on the relationship.We find that the reduction of perk expenditures helps to further enhance the role of mandatory dividend policy on R&D expenditure.(3)When parent CSOEs are mandatorily required to pay dividend to the governments,the listed CSOEs would experience a substantial decrease in the probability and frequency of mergers and acquisitions of listed CSOEs.This effect mainly exists in firms with higher level of financing constraints,lower level of net cash flow from operating activities,higher level of occupancy of controlling shareholders,and lower level of government subsidies,indicating that the adverse cash shock for parent CSOEs could restrain the merger and acquisition of listed CSOEs through shrinking the resources under management control and alleviating the agency problems.We further examine the impact of the implementation of the mandatory dividend policy on the performance of mergers and acquisitions.In terms of short-term performance,we find that the market is not optimistic about the mergers and acquisitions.Regarding long-term performance,mergers and acquisitions of the listed CSOEs cannot bring benefits to the acquirer.(4)When parent CSOEs are mandatorily required to pay dividend to the governments,the investment efficiency is substantially improved in listed CSOEs.A plausible mechanism is that adverse cash shocks of parent CSOEs could facilitate the resource reallocation through related party transactions within a business group motivated by the listed CSOEs’ investment opportunity instead of the parent CSOEs’ tunneling behavior.Our findings are more pronounced for firms with better external and internal governance.Finally,we summarize the research conclusions and put forward policy recommendations.In addition,we also point out the research deficiencies of this article and the possible future research directions.