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Does quasi-mandatory dividend rule restrain overinvestment?

Xiaoquan Wei, Chunfei Wang and Yunnan Guo

International Review of Economics & Finance, 2019, vol. 63, issue C, 4-23

Abstract: We study the impact of a quasi-mandatory dividend rule on restraining corporate overinvestment in China. In 2008, the Chinese government adopted a regulation mandating that publicly listed firms pay out a minimum of 30% of their average earnings over the preceding 3 years as cash dividends before the firms can apply for SEOs. The 30% Rule in China is unique in the sense that it applies only to firms applying for SEOs. Our findings suggest that firms paying small dividends (but not meeting the 30% Rule) better restrain their overinvestment after the 30% Rule than the control firms. The 30% Rule, while meant to encourage firms to pay more dividends, pushes small-dividend firms to improve their investment efficiency by lowering the extent of overinvestment. For firms paying no dividends, we find that, after implementation of the 30% Rule, their overinvestment increases. Finally, we document that the impact of the 30% Rule on restraining overinvestment among small-dividend firms is attenuated if they have bad agency problems. Our findings offer policy implications for other emerging markets considering adopting mandatory dividend regulations.

Keywords: Mandatory dividend rule; Agency problem; Overinvestment (search for similar items in EconPapers)
JEL-codes: G28 G35 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1016/j.iref.2018.07.001

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