A Research On The Impact Of The Semi-mandatory Dividend Policy On Firms' Investments

The government will tend to introduce mandatory dividend rules to protect the interests of minority shareholders in the emerging capital market,as a supplementary method of their weak legal system.The semi-mandatory dividend policy in China is one of them.At the early stage of Chinese capital market,before 2000,many of the listed firms were not willing to pay dividends,the capital market was full of speculators.To make the capital market develop in a healthy way,CSRC(China Securities Regulatory Commission)began to supervise the listed firms' dividend behaviors.In 2006,CSRC required the listed firms to satisfy a certain level of dividend payouts before they could refinance in the public stock market.The rule is not mandatory,but it does limit the behaviors of the firms which have refinancing needs.So the Chinese scholars name it semi-mandatory dividend policy.Many studies agree that the policy has some negative effects that need to be concerned.First,the policy makes firms more willing to pay dividends,but has little effect on raising the dividend rates.Second,the policy is designed to link dividend behaviors with refinancing qualifications in the public stock market.This can't restrict the dividend behaviors of those firms which do not have the refinancing needs.Third,for those firms which pay relatively high dividend rates,the policy has a negative incentive to reduce their dividend rates to the level that the policy required.Forth,there are other refinancing ways to avoid the policy's constraints.information asymmetry makes the cost of external finance higher,so the dividend payments and investment compete with each other on the internal cash flow.Mandatory policy may have negative effects on the firms' investment.So,in this paper,I want to study the effect of the semi-mandatory policy from the view of investment.First,based on existed studies,the policy has little effect on raising the dividend rates,so it may not reduce the internal cash flow on investment,so I tested on the background of the policy,if firms' dividend payments have negative effects on their investments.Second,firms' value counts more on efficiency investment not just the growth of investment,so I studied how the policy effect the firm's investment efficiency.Will it have a corporate governance effect which will reduce the over-investments? And will it make the firms,short of cash,and harder to invest then aggravate the under-investment level? For different dividend rates and different ownership structures,if the differences will be significant?In this paper,I use the data from 2003 to 2017 of all the non-financial listed firms in Shanghai and Shenzhen Stock exchange markets.I have several conclusions about the impact of the semi-mandatory dividend policy on firms' investments.First,under the policy's background,the dividend payout does not have a significant effect on the growth of firm's investment expenditure.Second,the policy does not have a significant negative effect on the firms' over-investment behaviors,but the firms' under-investments are alleviating after the policy.The policy's negative effect on the firms' over-investments is the worst when the over-investment firms' dividend payouts just meet the refinancing requirement.But as they raise their dividend rates,their over-investments were significantly reducing after the policy.But for the firms which have under-investment problems,the problems alleviate most for the firms which pay dividend payouts that just satisfy the refinancing requirement.The paper also finds that the policy's negative effect on firms' over-investment is significant in central state-owned enterprises,but not significant in local state-owned enterprises and private enterprises.Overall,the semi-mandatory policy's positive effects on firms' investment is limit.There are two aspects,in the high dividend rates group,policy have significantly negative influence on over-investments,and the firms' under-investments are alleviating after the policy.But for the first one,they are not the major part of all the listed firms,and the second one always come with some costs.There are two aspects of innovations in this paper.First,in the study method,based on the work of Martins and Novas(2012),the paper uses fuzzy discontinuity regression to deal with the endogenous issue between the dividend payout and investment growth.Second,on the subject,the paper distinguishes the differences in dividend payout rates and different ownership structures.