Investment in Hard Times: Unintended Effects of Mandatory Dividend Policy in State-Owned Business Group

48 Pages Posted: 7 Jun 2021

See all articles by Dongmin Kong

Dongmin Kong

Department of Finance, Huazhong University of Science and Technology; School of Finance, Zhongnan University of Economics and Law

Lihua Liu

Huazhong University of Science and Technology

Date Written: May 31, 2021

Abstract

This study examines capital allocation efficiency in the business group when parent firms experience adverse shocks of financial conditions. We exploit a quasi-experiment in China, the mandatory dividend of a state-owned business group in 2007, to conduct difference-in-differences estimation, and find that: (1) When parent central state-owned enterprises are mandatorily required to pay dividend to the governments (parent CSOEs), their group-affiliated listed central state-owned enterprises (listed CSOEs) substantially improve investment efficiency. (2) A plausible mechanism is that adverse cash shocks of parent CSOEs could facilitate the resource reallocation through related party transactions within a business group motivated by the listed CSOEs’ investment opportunity instead of the parent CSOEs’ tunneling behavior. (3) Our findings are more pronounced for firms with better external and internal governance. Overall, we provide the empirical evaluation of the economic consequences of mandatory dividend policy in terms of a firm’s investment efficiency within a state-owned business group.

Keywords: Mandatory dividend policy; Investment efficiency; Business group; Related party transactions; Corporate governance, China.

JEL Classification: G34, G31

Suggested Citation

Kong, Dongmin and Liu, Lihua, Investment in Hard Times: Unintended Effects of Mandatory Dividend Policy in State-Owned Business Group (May 31, 2021). Available at SSRN: https://ssrn.com/abstract=3856964 or http://dx.doi.org/10.2139/ssrn.3856964

Dongmin Kong (Contact Author)

Department of Finance, Huazhong University of Science and Technology ( email )

Wuhan, Hubei 430074
China

School of Finance, Zhongnan University of Economics and Law ( email )

Wuhan, Hubei 430073
China

Lihua Liu

Huazhong University of Science and Technology ( email )

1037# Luoyu Road, Hongshan Dist.
Wuhan, Hubei 430074
China

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