Dividend Tax, Managerial Ownership And Dividend Policy

In recent years, equity incentive spreads as a corporate governance mechanism to motivate managers and reduce agency costs and is adopted by more and more listed companies. In all authorized equity incentive plans, half of the plans using restricted stock as the incentive. Managerial ownership has two effects, interest convergence effect and entrenchment effect. If the equity incentive is not designed properly, leading entrenchment effect to dominate, the equity incentive plan cannot take effect as expected. Therefore, it is necessary to research the effect of managerial ownership on corporate governance.This paper researches the effect of managerial ownership on corporate governance from the aspect of the effect of managerial ownership on dividend policies. Based on summary of relative theories on managerial ownership, dividend policies and dividend taxation, this paper analyzes effects of managerial ownership on dividend policies when the dividend tax changes. The analysis shows that when the dividend tax rises, dividend payment will be decreased whether managerial ownership is high or low. When the dividend tax is reduced, managers with high share ownership would like to increase dividend payment out of self-interest; mangers with low share ownership may increase dividend payment under pressure of large shareholders or not change the dividend policy.2005 dividend tax cut(Caishui[2005]102) reduced the dividend tax from 20% to 10%. This paper uses this event of change of the dividend tax to research whether the effect of managerial ownership on dividend policies has changed after the event and analyzes the effect of managerial ownership on corporate governance according to the result. The main empirical results of this paper are as follows:(1)The dividend tax cut caused the mangers who own shares to increase the dividend payment. The 2001-2004 sample shows that managerial ownership did not affect dividend payment propensity significantly and the proportion of managerial ownership was not correlated with the dividend payout ratio. The 2005-2008 sample shows that managerial ownership was positively correlated with the propensity of dividend payment significantly and the proportion of managerial ownership was positively correlated to the dividend payout ratio. The result implies that the impact of managerial ownership rose after the dividend tax cut.(2)This paper divided the sample into subsamples of high managerial ownership and low managerial ownership. In both 2001-2004 and 2005-2008 samples, only high managerial ownership affected dividend policies significantly. After the dividend cut, the influence of high managerial ownership on the dividend policies changed, increasing propensity of dividend payment and dividend payout ratio; low managerial ownership did not affect dividend policies significantly.(3)Managerial ownership and dividend propensity has U-shaped relationship and the critical proportion was 7.57%.(4) The non-tradable shares reform affected dividend policies during the sample period. This paper adds non-tradable shares reform variable in the regression. The result shows that the non-tradable shares reform depressed the positive effect of managerial ownership on the dividend payment. Considering the non-tradable shares reform can improve corporate governance and managerial ownership can facilitate entrenchment, this paper proposes that the motive of high managerial ownership causing the rise of dividend payment was gain personal interests.