Why do firms pay stock dividends: Is it just a stock split?

Xi He, Mingsheng Li, Jing Shi and Garry Twite
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Xi He: Research School of Finance, Actuarial Studies & Applied Statistics, The Australian National University, Australia
Mingsheng Li: College of Business Administration, Bowling Green State University, USA
Jing Shi: International Institute for Financial Studies, Jiangxi University of Finance and Economics, Jiangxi, China; School of Economics, Finance and Marketing, RMIT College of Business, RMIT University, Australia
Garry Twite: Department of Finance, University of Melbourne, Australia

Australian Journal of Management, 2016, vol. 41, issue 3, 508-537

Abstract: This paper examines why firms choose to pay stock dividends. Using a sample of listed Chinese firms we find that older, more profitable firms with lower leverage, higher levels of retained earnings, private ownership prior to listing, that invest more in fixed assets and operate in regions with lower shareholder protection are more likely to pay stock dividends. Consistent with stock dividends substituting for stock splits, our evidence indicates that the initiation of a stock dividend is associated with a significant positive market reaction and increased analyst following. These results suggest that firms use stock dividends to attract analysts’ attention. In addition, the positive announcement effect for stock dividends increases with the size of the split factor, suggesting that management use stock dividends to keep the firm’s stock price within its acceptable trading range.

Keywords: Dividend policy; stock dividend; stock split (search for similar items in EconPapers)
JEL-codes: G14 G35 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:sae:ausman:v:41:y:2016:i:3:p:508-537

DOI: 10.1177/0312896214553858

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