Ownership Nature Of Ultimate Controller, Cash Dividend Distribution And Earnings Quality

Since November 2011, China CSRC requires that all quasi listing companies mandatorily disclose their dividend distribution policy and plan after listing in the PO prospectus. The dividend distribution policy should be noted as important matter, and shall not adjust once determined. This requirement is regarded as new dividend policy of Chinese listed companies.Dividend policy of listed companies has always been a hotspot of research. Miller and Modigliani (1961) put forward the famous "dividend irrelevance theory", which says that under a series of assumptions, the cash dividend is not relevant with shareholder value. Scholars gradually relax these assumptions and have done various researches on the subject of "information content of dividend policy". These researches are based on two basic theories: signaling theory and agency theory.Foreign studies show that unexpected dividend changes often leads to stock price changes. But there is no unanimous conclusion about the relations between dividend changes and reported earnings. In recent years, some scholars have changed their methods and found partial evidence to prove that dividend changes have earnings information content.Because of the immature capital market in China, early domestic researches do not find positive correlation between the cash dividend policy and stock price. With the implement of cash dividend distribution provisions by the State Council and the CSRC, legal protections for investors are becoming stronger. In recent years, scholars have found the relation between dividend changes and stock price changes. As to the agent theory aspect, there are also quantities of researches. Whether cash dividend can be used as a constraint mechanism and help reduce agent cost, there is no definite answer. On the relation between dividend changes and reported earnings, domestic researches also can be roughly divided into two categories:dividend has earnings information and dividend has not earnings information, both have corresponding empirical evidence.Therefore, most prior literature focuses on the effects of dividend changes on future earnings and stock price changes. Different from that, this paper examines whether dividend paying status per se is informative about one aspect of earnings—earnings quality. This paper tests two dimensions of cash dividend paying status:the willing to distribute and the extent of distribution.Domestic researches also focus on dividend changes and have no agreement on dividend policy and earnings. What’s more, domestic researches that link cash divided status and earnings quality are relatively rare, and the date used in the exiting researches is quite early before the share reform. So there exits expanding space both in research methods and research data.On this basis, this paper considers the influence of China’s unique system environment. State-owned enterprises account for a large proportion in China, and problems of soft budget constraint, the lack of owner and internal control pervasively exit in state-owned enterprises. Empirical studies show that there are significant differences on company behavior and performance between Ihese two kinds of enterprises. However, there is no unanimous conclusion on the relation between the nature of ultimate controller and earnings quality, nor for cash dividend distribution. Whether state-owned enterprises have higher earnings quality or are more inclined to distribute cash dividends, mere are different conclusions in different literature. This is worthy for further study.Moreover, relationships between cash dividend and earnings quality may be significantly different in different property companies. Thus this paper considers ownership nature of ultimate controller’s effects on their relationship.This paper adopts earnings quality proxies reflecting both base accounting and market relate index, and the results are robust. The paper finds that:(1) cash dividend distribution has a positive impact on earnings quality. (2) There is a positive correlation between earnings quality and distribution rate of cash dividends. (3) Compared to private-owned enterprises, the relationships above between cash dividend and earnings quality are more significant in state-owned enterprises.On the basis of researches about dividend information content, this paper investigates the relation between cash dividend and earnings quality and enriches relative academic literature (Skinner and Soltes,2010; Hanlon et al.2007). Meanwhile, this paper provides empirical evidence for the notion that "dividend has earnings information" (Breeden,2003; Malkiel,2003; Glassman,2005). This papers helps to enhance the understanding of the role of cash dividend in corporate government.Besides, consideration of the ownership nature of ultimate controller contributes not only to relative literature, but also has practice value. It’s meaningful for regulators to strengthen the protection of investors and listing companies to improve earning quality.