An Empirical Research On The Reactions Of Stock Market To The Dividend Event In China

It was reported that in the year of 2014 American public firms had distributed about $900 billion to their shareholders via repurchase and dividend which was equal to 95% of their net profits. In contrast, a large portion of China’s public firms are reluctant to distribute their profits, thanks to which, investors in China gain little from dividends or repurchases. A stock market without regular and considerable dividends is like a casino. Relying solely on capital gains is a zero-sum game, through which, fortune of investors will not increase at all. Most of the investors in China’s stock market are individuals and the institutional investors love to hype popular investment concept. Short-swing trading prevails in the stock market, and value investing with long-term buy-and-hold strategy is rarely seen. All of the above cause China’s stock market to be rather volatile and drive the market index to rocket and plump from time to time. In addition, retaining too much cash is harmful to the management which may add to agency costs.Based on the literature review, we find empirical research on the reactions of stock market to long-term dividend policy is still a gap, and the research on announcement effects can be refined further.A responsible dividend policy is key to making capital market perform well and protecting the interests of medium and minor investors. It’s an inevitable choice for the CSRC to urge public firms to pay out dividends regularly. At present, public firms have to pay out 30% of their profits within 3 years to get access to seasoned equity offerings. Against this backdrop, studying the reactions of the market to payout event is meaningful. Our research can help to assess the effect of supervisory policy, provide investment advice for investors, and provide references for public firms making payout policy.First, this paper conducts research on the reactions of market to dividend announcement event, using 6595 announcement events of 2009-2014, to examine whether there is dividend announcement effect or not, compare the announcement effects of different types of dividends, and investigate the impacts of stock market cycle and firm characteristics on the announcement effects. The results of our empirical research show that(1)in short run, the more dividends firms pay out, the bigger and longer the effects of announcement event are;(2) in short run, investors show a stronger but shorter enthusiasm for hybrid dividends;(3) in short run, firms of good fundamentals can generate bigger announcement effects.Then, this paper study the impacts of long-run dividend policy on firm valuation, using 3039 samples of long-term dividend policy, to see if investors give credits to firms regularly and generously distributing their profits. In the long-term, firms pay out their dividends regularly have an edge of firm valuation, in other words, ceteris paribus,the more frequently and generously the firms distribute their profits, the Tobin’s q of the firms is bigger and the fraction of institutional holdings is higher. These results hold after controlling for firm-specific variables and are robust to sub-sample regression and potential endogeneity bias.This paper contributes to current research of dividends in two aspects:(1) Not only does it refine the study of short-term effects of dividend announcement event, but also it investigates the impacts of firm characteristics on effects of dividend announcement event, and the empirical approach makes our results more robust;(2) It’s the first time that impacts of the long-term dividend policy on firm valuation has been investigated, and our empirical approach avoids the serial correlation of financial index and the endogenous problem which makes our research reliable...