Investor Protection,Agency Costs And Cash Dividends

The problem of cash dividends has long been a common concern of theory and practice. China’s capital market developed rapidly since its establishment in the1990s, but cash dividends have not become the major source of income for investors. On contrary, China’s investors still lay too much emphasis on capital gains, which results in frequent fluctuations in the stock market and the downturn of it for several years. Given this, regulators have repeatedly introduced policy measures to regulate the behavior of listed companies issuing dividends, most recently in December2013, the State Council issued the document about further strengthening capital markets to protect the legitimate interests of small investors. The opinions can be divided into nine items, referred to as the National Nine Items which clearly elevated the investor protection to a very important position, and be regarded as a major base of China’s capital market development, indicating the country’s determination to further improve the protection of small investors in the capital market. Dividend payout is generally considered to be an effective means of protecting investors, after the introduction of National Nine Items, the Commission is brewing a new round of measures to force payment of dividends again, but can dividend payout really protect the interests of investors? If so, does the protective effect depend on certain prerequisite conditions? Will the mandatory dividend regulatory measures follow the footsteps of semi-mandatory dividend policy and become unrewarding? These are urgent problems to discuss and solve.Due to the practical needs of the dividend policy research, the factors affecting cash dividend and how these factors affect the development of the company’s cash dividend policy has also been the theorists concern. Following the MM dividend policy irrelevance theory, signaling theory and agency theory of dividends are two main dividend study perspective, especially the agency theory of dividends is adopted by more scholars, and formed the basis of "free cash flow" hypothesis and the "tunneling" hypothesis.These two theoretical hypotheses are both used in empirical research and are both confirmed. On the other hand, with the further study of the agency theory and the "tunneling" hypothesis, investor protection issues, especially the protection of small investors has gradually drew attention. Because in the "tunneling" hypothesis, as the company’s controlling shareholder has the right to determine dividend policy, the influence of minority shareholders on dividend policy is very limited. Under this circumstance, the controlling shareholder is prone to pursue their own interests at the expense of minority shareholders’ interests, and work out dividend policy that is against small investors’ interests. In this case, the role of investor protection law is similar to the corporate governance mechanism which is intended to constrain the behavior of the largest shareholder, so investors’ law can be seen as a part of the corporate governance mechanism. In turn, corporate governance mechanisms, in particular the nature of the ownership and control structure can also become a corresponding micro-level protection mechanism.Based on the agency theory of dividend policy, focusing on the relationship between investor protection and the cash dividend policy, this thesis reviews in the presence of agency costs, how is the relationship between legal protection of investors and cash dividend policy. Referring to "Chinese market process-the process of regional market is relatively report" wrote by Fan Gang, Wang Xiaolu, this thesis uses the "market intermediaries and legal environment" index as the measure of legal protection of investors, use the data of listed companies in shanghai and Shenzhen stock exchange form2008-2012to explore the relationship between legal protection of outside investors and cash dividend in depth. The empirical study found that the macro-level legal protection of investors can not function alone. In the absence of legal protection, the corporate governance structure especially the ownership structure has become a dominant factor of micro-level investors’ protection. The separation of cash flow rights and control right of controlling shareholders of listed companies is common, the cash flow rights and agency costs are positively related, and control right and agency costs are negatively related. The higher the control right, the more cash dividends payout, it is when the dividend further exacerbating agency costs between controlling shareholders and minority shareholders, the dividend payout has weakened the protection of investors’ interests.The role of external and internal corporate governance investor protection is not split out, when the external investor protection and internal governance mechanisms are put into the same research framework, empirical conclusions confirmed that strengthening the legal protection of outside investors will weakening of centralized control rights and reduce its dividend payout, reduce agency costs. Conclusions of this thesis also reveal that legal protection of investors functions by affecting the ownership structure in order to act on cash dividend policy. There is a kind of transmission mechanism----legal protection affects the concentration of ownership, and ownership concentration determines the company’s governance structure and thus affects cash dividend policy, this thesis builds up a bridge between investor protection and cash dividends.Based on state-owned companies and non-state-owned companies subjected to significantly different agency cost problem, this thesis also inspects investor protection mechanisms of state and non-state-owned companies. By dividing all samples into state-controlled and non-state-owned holding companies, the findings confirmed that:the investor protection mechanisms of state-owned companies are significantly different from that of non-state-owned companies, the effects of legal protection on companies are significant, the impact of control rights on non-state-owned companies is significant. Finally, based on the above conclusions, this thesis put forward two corresponding policy advices from two perspective of legal protection of investors and corporate governance mechanisms.