A Study On Information Content Of Cash Dividend Increase Under Semi-mandatory Dividend Policy

In recent years, some strange phenomena happened to dividend paying. There are some companies paying no cash dividend for years. And some other companies granted ultra-ability cash dividend. Most listed company in china paid much attention to money encirclement but paid dividend with low rate. With the purpose to protect the right and interests of investors, Regulators made series of policies which is called Semi-mandatory dividend policy. This policy matches dividend payment with qualifications of refinancing and takes the certain level of dividend paid by listed companies as a prerequisite for their refinancing qualifications. However, can this Semi-mandatory dividend policy exert positive effects to the market and company?On the one hand, study found that low cash dividend payout ratio and high dividend tax made investors in our capital market prefer stock dividend to cash dividend. On the other hand, Semi-mandatory dividend policy has to face the limitation of "regulatory paradox". With Semi-mandatory dividend policy, some companies with high-growth need to pay high cash dividend to obtain refinancing qualification and will get into trouble easily. In that way, can Semi-mandatory dividend policy satisfy investors? If not, will this policy influence the corporate governance and distorts the information conveyed by cash dividend increase?In order to solve the two questions above, this paper makes research on listed companies issued in A-share market that has cash dividend increase between fiscal year2008and2011.We firstly research the market reaction to cash dividend increase after the policy implementation. The empirical result shows that the capital market has a negative response to cash dividend increase, which means the policy can’t satisfy investors. Then, we research the information content of the cash dividend increase. Compared with a matched sample, we find that companies with refinance motive will increase cash dividend even if they suffered profit reduction. To get the refinancing qualification, companies with refinance motive have to give higher dividend when they are out of money. What is worse, this cash dividend increase will result in lower profit in the next year. It means that cash dividend increase of companies with refinance motive can not reflect profit increase in current period and indicate lower profit in next year. The information of cash dividend increase in these companies is completely opposite to the theory of dividend signal. In conclusion, we argue that Semi-mandatory dividend policy distorts the information conveyed by cash dividend increase and may not play a good role in dividend policy making of listed company. And we further put forward some recommendations about how to practice this policy.