A Research On The Market Reaction To Cash Dividend Initiation Announcements Of China’s Listed Companies

According to the MM theory, dividend policy is irrelevant in a perfect market. Value of the company and stock price are not affacted by dividend policy. They are affected by the profitability which is decided by corporate’s investment decisions. However, in the real world, annual dividend payments from global listed companies and investors’ strong reflections of changes of cash dividends can make a big influence on the stock market.Dividend policy is important both for the company and investors.Since "the dividend puzzle" appeared. Western academics and practitioners began to make lively discussions on ’why the company paid dividends’and’why investors concerned about the dividends’.The agency costs theory and signaling theory of cash dividend are the most mature theories to explain dividend policy.Agency costs theory of cash dividend expain the reason why dividends are paid from the angle of reducing agency cost. Cash dividends can reduce internal free cash flow and impose constraint on manager’s behavior. On the one hand, the payment of cash dividends can directly reduce the amount of free cash flow and agency costs due to managers’misuse of free cash flow. On the other hand, the payment of cash dividends reduce internal financing sources, prompting companies to enter into capital market for external funds.The supervision of the capital market indirectly reduce the agency costs. Cash dividends have large function on the companies with serious agency problems,which would led to a positive market reaction.Dividend signaling theory is built on the assumption of asymmetric information. Managers have more information about the company operations and future profitability. They would choose to transmit the massages though the initial payment of cash dividends (or increasing cash dividends). Informations of the future earnings are effectively passed to the investors.Therefore, the payment of cash dividends will generate positive market reaction, unexpected cash dividends are expected to bring the rising of stock prices.China’s capital market has experienced20years’ development,The corporate governance of listed companies have been maturing. But phenomenons of low cash dividends and no dividends paid has been existed.Cash Dividend issues draw attentions of the industry and academia.The significance of the research on the market reaction of the cash dividends is to provide recommendations for regulatory authorities and improve effectiveness of the dividend policy.The main conclusions are:first, initial cash dividend distributions can bring positive excess returns to investors. Second, the cash dividend policies of chinese listed companies support the agency costs theory of cash dividends. Companies with the overinvestent tendency have more cumulative excess return for initial payment of cash dividends.Cash dividend payments really reduced the free cash flow in the hands of managers, and made constraints on overinvestment behaviors.Third,the signaling theory of cash dividends does not hold in china. Unexpected cash dividend have no significant influence on the company’s share price.