Study On Relationship Between Free Cash Flow, Controlling Shareholders And Cash Dividend Distribution

Dividend distribution is one of the core financial activities for the modern corporations, and it is also research emphasis of the theorists and practitioners.As the most important form of dividends, payment of cash dividends is the key of the dividend policy research. What's the motivation for listed companies distributing cash dividends, most domestic scholars explained this problem from perspectives of the general factors and the largest shareholder damaging the interests of other small shareholders, and this conclusion formed before Full Circulation Reform for Listed Companies.In August 2005, China's implementation of Full Circulation Reform has great influence on ownership structure and governance structure of Listed Companies, which also makes the motivation for payment of cash dividends change greatly,so it is very necessary to study these changes.This article chooses the perspectives of free cash flow (FCF) and controlling shareholders which reflect the state of corporate governance to explore the true motivation of paying out cash dividends for listed companies before and after Full Circulation Reform.In order to fully reflect the effect of Full Circulation Reform, the paper chooses the 197 A-share listed companies which have completed reform deadline to January 2006, and then makes comparative analysis of situations in four years before and after the reform, so the time span of research data is 2002-2009.After the analysis, this paper argues that controlling shareholder of non-tradable shares exist in most China's listed companies before the Full Circulation Reform. The cost of the controlling shareholders obtaining IPO shares and additive issued shares is far below the cost of minority shareholders, so controlling shareholders can get excess returns from the payment of cash dividends. And because liquidity is considerably limited, non-tradable shares can't enjoy the bid-ask spread, and the only way for them to realize the value is the payment of cash dividends. Coupled with the lack of effective protection of minority shareholders in laws, controlling shareholders'expropriation is the true motivation of paying out cash dividends in this period. At the same time,the motivation of free cash flow is not obvious because that strength of minority shareholders is weak,and state shareholders is absent, ect.After the analysis, the paper argues that after the Full Circulation Reform the non-tradable shares continue to reduce their stakes, and even gradually achieve full circulation. At the same time, as the elite investors such as the strong individual investors, institutional investors and foreign investors join in our country investors, the equity structure of listed companies in China is more diverse leading to improvements of ownership structure and corporate governance.In addition, the protection policy of minority shareholders has been strengthened, so the motivation of free cash flow which is the most important basis of paying out cash dividends is enhanced. After Full Circulation Reform, the controlling shareholder's ownership percentage is falling, and the cost of the controlling shareholders obtaining IPO shares and additive issued shares is becoming same with the minority shareholders.The effect of excess returns brought by cash dividends for the controlling shareholders gradually eliminates, so controlling shareholders' expropriation motivation of paying out cash dividends is restricted effectively in this period.However,with the development of Full Circulation Reform for Listed Companies, non-tradable shares gradually obtain liquidity, the excess between cash right and voting right for controlling shareholders in listed companies is becoming larger. And it makes controlling shareholders use more subtle means such as capital occupation, connected transaction to expropriate the interests of minority shareholders. This effect weakens the motivation of free cash flow and reduces the level in payment of cash dividends after the Full Circulation Reform. For this situation, this paper proposes four specific macro and micro measures to reduce this negative effect.