Dividend Regulation, Cash Dividends And Corporate Overinvestment

Investment decision of listed companies plays a core role in the financial decisions,and it is also the main source of corporate value creation. The inefficient behavior ofenterprise investment has seriously damaged the interest of shareholders and the healthydevelopment of macroeconomic, and it has been an important content of moderncorporate finance research. In terms of the companies’ insufficient investment, bothdomestic and foreign scholars have analyzed the diffident reasons, and then they proposedvarious suppression methods to restrain this. During business managers make investmentdecisions, especially when there is a lot of free cash within the enterprise, they usuallyprefer to choose the businesses with lower yield and even negative yields for the sake ofmaximizing their own interests. But in fact, this behavior causes overinvestment.Furthermore the result of inefficient investment behavior could greatly break the optimalcondition of resource allocation, and thus the development of enterprises could be badlyaffected.Since March2001,"IPO listed companies management approach" published, ChinaSecurities Regulatory Commission issued a series of dedicated policy documents to guideand regulate the behavior of listed companies’ dividend distribution. These documentslinked the cash dividend with refinancing, and rewarded the cash dividend companies byrefinancing support. Many studies defined this series of policy documents as"semi-mandatory dividend" policy, and they will change the cash flow of listedcompanies. These documents mainly include the2006introduction of the "securitiesissued by listed company management approach" and the2008introduction of the"Decision on Amending Some Provisions of cash dividends of listed companies". Thesetwo policy documents carried out the dividend payout ratio of20%and30%respectively.In this macro environment, cash dividends on the role of corporate overinvestment arebound to change. Then, exactly what kind of dividends regulatory could have an effect onthe relationship between cash dividends and corporate overinvestment? Is there adifference among the dissimilar strength of the dividends regulatory impact on therelationships between cash dividends and overinvestment?This essay will test the function about the inhibition of the cash dividend policy oncompanies’ overinvestment behavior. Furthermore, it will investigate the effects of cashdividends on the companies’ overinvestment under the separation of ownership. Using 2003-2011Shanghai and Shenzhen A-share stock market listed companies as samples,Richardson model is used to measure the level of companies’ overinvestment. In thismodel three different levels of dividends regulatory are distinguished for different listedcompanies regulatory sample data, and meanwhile an Empirical Study shows the effectsof cash dividends on the companies’ overinvestment under the different levels ofdividends regulatory. Finally, this model verified the practical effect of cash dividends onlisted companies’ overinvestment behavior.The results of this study shows that although dividends regulatory providesregulatory environment for cash dividends reducing agency costs and restrains excessiveinvestment, the improvement of regulatory environment cannot simply rely on a higherproportion of cash dividend distribution. The connection between cash dividends andinvestment behavior relies on company rational behaviors rather than some externalfactors such as the excessive interference of government.