Dividend Policy, Information Asymmetry And Market Liquidity

Over the past two decades, Chinese stock market has developed rapidly and becomean important part of people’s economic life. It is playing an important role in Chineseeconomic construction. Nevertheless, the stock market has been always troubled byhigher speculation and volatility phenomena. There are many reasons for excessivespeculation. One of the essential reasons is that the dividend policy is unconstrained andnot regulated. Because the listed companies usually pay few dividends or even paynothing for investors, their equities are lacking long-term investment value. The mainreturns for investors come from the speculative capital gains. According to the latest rulesof China Securities Regulatory Commission（CSRC）, the listed companies need toannounce their dividend policy when they apply for IPO. And their real paymentimplementation should be regulated by CSRC. Therefore, the dividend policy of listedcompanies is becoming more and more normative.Market liquidity is an important indicator of stock market quality. Good marketliquidity can improve the financing environment, keep the stock market stable andprotect the interests of small investors. A large number of studies suggest that the listedcompanies can improve the liquidity of their equity through high-quality informationdisclosure. Dividend policy announcement is an important way of companies’information disclosure. So it will affect investors’ trading behavior and the stock liquidityaround the corresponding announcement. Foreign scholars have studied the investment,the information and the stock liquidity in quote-driven market through theoretical orempirical method. But their hypothesis and conclusions are not same. The domesticresearch on this area is very few. So the research will be special and significant,especially for an order-driven market in China.Therefore, this thesis analyzes the effect of dividend policy of listed companies oninformation asymmetry and market liquidity in China based on the financial marketmicrostructure theory about information asymmetry and stock market liquiditymeasurement. This thesis mainly includes the following aspects:In the first part, we proposes the background and significance of the research. Thenwe list the literature review of domestic and foreign research. Finally we state the research contents, the technical route and innovations.In the second part, the thesis describes the relevant theory. Firstly, we introduce thebasic knowledge of the dividend policy, information asymmetry and market liquidity.Then we state the relationship between the dividend policy， the asymmetric informationand market liquidity. The theory between the dividend policy and the asymmetricinformation is mainly based on signaling theory. The dividend signal hypothesis suggeststhat dividends have a certain impact on stock prices. It’s a way for managers to transferinformation to outsiders. The information model suggests that the reduction of theinformation asymmetry will help improve liquidity of stock market.In the third part, we do some empirical research on the relationship between thedividend policy of listed companies, information asymmetry and stock liquidity. First, wemake a comparative analysis on the information asymmetry degree of the companieswhich pay cash dividend in Shanghai A-share market by using the adverse selectioncomponent in the LSB model (1995) and the effective bid-ask spread as a measure ofasymmetric information before and after the cash dividend announcement. By employingthe Paired t-test and the Wilcoxon signed ranks test we find that after the announcementof the dividend policy the high-dividend policy samples can lower the degree of theinformation asymmetry obviously while the low-dividend counterparts can not. Thereason is related with the current situation of divedend payment policy in China. Second,we use the turnover rate and the illiquidity ratio as a measure of liquidity indicators andmake empirical research on the relationship between asymmetric information and themarket liquidity. We find the information asymmetry is negatively correlated with thelevel of liquidity after we controlled the volume, market price to net assets ratio, thecompany size, the asset-liability ratio and the ownership concentration. Finally, we makea comparison of the market liquidity by the Paired t-test and the Wilcoxon signed rankstest. We find that the level of liquidity is lower than before. It doesn’t accord with thetheoretical expectation. Then the thesis gives the reason for this phenomenon.Finally, the thesis proposes some countermeasures about how to keep the markethealthy, to maximize the returns of the investors, to reduce the information asymmetryproblem and to improve the level of liquidity. This thesis puts forward the following suggestions according to the result of the empirical research: regulating their dividendpolicy and playing its signal transfer function; improving the cash dividend policythrough the reform of the tax system; developing the long-term investors and reducingmarket speculation; improving the information transmission mechanism andstrengthening the stock market supervision; perfecting administrative structures of thelisted companies and playing the internal supervision mechanism, etc.