Institutional stock ownership and firms’ cash dividend policies : evidence from China

Michael FIRTH, Jin GAO, Jianghua SHEN, Yuanyuan ZHANG

Research output: Journal PublicationsJournal Article (refereed)peer-review

125 Citations (Scopus)


Agency theory suggests that outside shareholders prefer higher dividend payouts in order to reduce the free cash flows of firms that are under the insiders’ control. Our study investigates the effects of mutual funds, typically the most important and influential type of outside shareholder, on firms’ dividend payouts in China during the period from 2003 to 2011. We find that mutual funds influence firms to pay higher cash dividends. The results are consistent with the predictions from exit theory. The effects are more pronounced in firms controlled by state and regional governments and in firms with relatively higher free cash flows. We also find evidence that the mutual funds’ effects are stronger when their investment horizon is longer and the ownership interest is larger. Other institutional investors, such as banks, insurance companies, and securities companies have a lower exit threat and do not have an influence on firms’ cash dividend payments or financial performances.
Original languageEnglish
Pages (from-to)91-107
Number of pages17
JournalJournal of Banking and Finance
Early online date28 Jan 2016
Publication statusPublished - Apr 2016

Bibliographical note

The authors thank Sonia Wong, Xianming Zhou, Hong Zou and seminar participants at Lingnan University, the Hong Kong Institute for Business Studies, Sun Yat-sen University, Seton Hall University, The 2013 Academic and Business Research Institute International Conference in Florida, and the 5th International Finance and Banking Conference 2013. The authors thank the two anonymous reviewers and the editor for very helpful comments on the previous version of the paper. The authors acknowledge the financial support from the Government of the HKSAR (LU340412) and (LU131042).


  • Dividend policy
  • Exit theory
  • Institutional ownership
  • Mutual funds

Cite this