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

Michael FIRTH; Jin GAO; Jianghua SHEN; Yuanyuan ZHANG

doi:10.1016/j.jbankfin.2016.01.009

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

Michael FIRTH, Jin GAO, Jianghua SHEN, Yuanyuan ZHANG

Department of Finance and Insurance

Research output: Journal Publications › Journal Article (refereed) › peer-review

105 Citations (Scopus)

Abstract

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 language	English
Pages (from-to)	91-107
Number of pages	17
Journal	Journal of Banking and Finance
Volume	65
Early online date	28 Jan 2016
DOIs	https://doi.org/10.1016/j.jbankfin.2016.01.009
Publication status	Published - 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).

Keywords

Dividend policy
Exit theory
Institutional ownership
Mutual funds

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10.1016/j.jbankfin.2016.01.009

Cite this

@article{c0054ab2b9b64f65af014749f984eb37,

title = "Institutional stock ownership and firms{\textquoteright} cash dividend policies : evidence from China",

abstract = "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{\textquoteright} control. Our study investigates the effects of mutual funds, typically the most important and influential type of outside shareholder, on firms{\textquoteright} 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{\textquoteright} 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{\textquoteright} cash dividend payments or financial performances.",

keywords = "Dividend policy, Exit theory, Institutional ownership, Mutual funds",

author = "Michael FIRTH and Jin GAO and Jianghua SHEN and Yuanyuan ZHANG",

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).",

year = "2016",

month = apr,

doi = "10.1016/j.jbankfin.2016.01.009",

language = "English",

volume = "65",

pages = "91--107",

journal = "Journal of Banking and Finance",

issn = "0378-4266",

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AU - FIRTH, Michael

AU - GAO, Jin

AU - SHEN, Jianghua

AU - ZHANG, Yuanyuan

N1 - 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).

PY - 2016/4

Y1 - 2016/4

N2 - 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.

AB - 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.

KW - Dividend policy

KW - Exit theory

KW - Institutional ownership

KW - Mutual funds

UR - http://commons.ln.edu.hk/sw_master/4452

UR - http://www.scopus.com/inward/record.url?scp=84957927421&partnerID=8YFLogxK

U2 - 10.1016/j.jbankfin.2016.01.009

DO - 10.1016/j.jbankfin.2016.01.009

M3 - Journal Article (refereed)

SN - 0378-4266

VL - 65

SP - 91

EP - 107

JO - Journal of Banking and Finance

JF - Journal of Banking and Finance

ER -

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

Abstract

Bibliographical note

Keywords

Access to Document

Other files and links

Investment Preferences and Firm Characteristics: Evidence from the Qualified Foreign Institutional Investor Scheme in China (投資偏好和公司特性: 中國“合格境外機構投資者”（QFII）實證研究)

Cite this

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

Abstract

Bibliographical note

Keywords

Access to Document

Other files and links

Projects

Investment Preferences and Firm Characteristics: Evidence from the Qualified Foreign Institutional Investor Scheme in China (投資偏好和公司特性: 中國“合格境外機構投資者”（QFII）實證研究)

Cite this