Differential market reactions to cash and stock dividend new perspective on chinese stock market

Abstract

Chinese stock market, as a unique emerging market, remains an unbroken ground in the dividend literature. State-dominated ownership structure makes firms more willing to choose stock dividend rather than cash dividend. Individual Investors, motivated by capital gain, prefer share dividend since the return rate of cash dividend is even lower than one-year time deposit rate. In this study, we investigate the price and volume reactions to stock dividend and cash dividend announcements, respectively. Our results indicate that stock dividend in Chinese stock market leads to stronger market reactions than cash dividend, which is contrary to those in developed markets. Initiation, as the extremely visible change in dividend policy, causes no shaper increase of price and volume than subsequent non-initiation announcement, no matter in the form of cash, stock share, or mixed dividend. We reason that because of low earning stability, firms in China are less tied to sustained dividend policy and adjust the payout ratio every year. Initiation, therefore, conveys less useful information about future earnings. Our findings hold even after controlling for the spillover of ex-date effect, measurement bias due to bid-ask bounce and risk change during event period.