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lOMoARcPSD|45316467 lOMoARcPSD|45316467
International Business Review 26 (2017) 816–827
Contents lists available at ScienceDirect International Business Review
j o u r n a l h o m ep a g e: w w w . e l s e v i e r . c o m / l o c at e / i b u s r e v
Foreign institutional investors and dividend policy: Evidence from China
Lihong Caoa, Yan Dub,*, Jens Ørding Hansenc
aBusiness School, Hunan University, China b
EDHEC Business School, France
c University of Agder, Norway and Niels Brock Copenhagen Business College, Denmark ARTICLE INFO ABSTRACT Article history: Received 19 February 2016
This study examines whether foreign institutional investment influences firms’ dividend policies. Using data from all
Received in revised form 11 January 2017
domestically listed nonfinancial firms in China during the period of 2003–2013, we find that foreign shareholding
Accepted 2 February 2017 Available online
influences dividend decisions and vice versa. 13 February 2017
Furthermore, changes in dividend payments over time positively affect subsequent changes in foreign
shareholding, but the opposite is not true. Our study indicates that foreign institutional investors do not change Keywords:
firms’ future dividend payments once they have made their investment choices in China. Moreover, they self-select Foreign institutional investor
into Chinese firms that pay high dividends. Our evidence suggests that in an institutional setting where foreign Dividend
investors have tightly restricted access to local securities markets and a relatively high risk of expropriation by Agency theory
controlling shareholders exists, firms can use dividends to signal good investment opportunities to foreign Signaling theory Corporate governance investors.
© 2017 Elsevier Ltd. All rights reserved.
0969-5931/© 2017 Elsevier Ltd. Al rights reserved. 1. Introduction
One important manifestation of the increasing integration of the
global economy in the past several decades has been the gradual
opening of developing countries’ securities markets to international
investors. In response to this trend, foreign institu-tional investment
has proliferated in emerging markets. While the growth potential of
corporations in these markets offers a tantalizing prospect of high
returns, foreign investors face information disadvantages because of
geographic distance, lan-guage barriers, and cultural differences.
Further, many emerging markets are characterized by weak protection
of minority shareholder rights, and foreign investors’ exposure to the
risk of expropriation by controlling shareholders gives them a strong
incentive to be vigilant in protecting their investments. This raises the
question of whether foreign investors play an active role in the
corporate governance of local firms.
This study addresses this question by examining the relation-ship
between foreign investors and the dividend policies of Chinese listed
firms. In November 2002, China partially opened its
* Corresponding author at: EDHEC Business School, 24, Avenue Gustave Delory—
CS 50411, 59057 Roubaix Cedex 1, France.
E-mail addresses: c aolhjy@gmail.com (L. Cao), y an.du@edhec.edu (Y. Du), je
nsordinghansen@gmail.com (J.Ø. Hansen).
http://dx.doi.org/10.1016/j.ibusrev.2017.02.001
shares were held by QFIIs in 2012 (Jiang & Kim, 2015). Therefore,
one may expect that foreign institutional investors in China are
dispersed outsiders who do not have the incentive or power to exert
domestic stock market to foreign institutional investors by launching a
oversight over the firms in which they invest. However, some studies
scheme assigning investment quotas to qualified foreign institutional
find evidence that foreign investors stabilize the Chinese capital
investors (QFIIs) that were officially approved by the China Securities
market (Han, Zheng, Li, & Yin, 2015) and play an effective monitoring
Regulatory Commission (CSRC). Since then, the system has been
role in the corporate governance of state-controlled Chinese firms
gradually expanded, and by the end of 2015, 294 international
(Huang & Zhu, 2015). While the literature on the impact of foreign
financial institutions had QFII status in China. Because of the quota
shareholding in other emerging markets that are more open to foreign
scheme, foreign institutional investors do not play as large a role in the
investors is growing (Baba, 2009; Buckley, Munjal, Enderwick, &
Chinese stock market as in other emerging markets that have a more Forsans, 2015; D
esender, Aguilera, Lópezpuertas- L amy, & Crespi,
liberal approach to foreign investment. For example, only 1.4% of A
2014; Jeon, Cheolwoo, & Moffett, 2011; Kim, Sul, & Kang, 2010), the
role of foreign institutional investors in China is not well known. lOMoARcPSD|45316467
L. Cao et al. / International Business Review 26 (2017) 816–827 817
The corporate governance literature shows that the principal–
centers on governance aspects such as firm restructuring (Ahmadjian
principal agency problem is pronounced in developing countries such
& Robbins, 2005), dismissing poorly performing CEOs (Aggarwal, Erel,
as China (Claessens & Fan, 2002; Jiang & Kim, 2015; La Porta,
Ferreira, & Matos, 2011), board monitoring (Desender et al., 2014),
Lopez-de-Silanes, Shleifer, & Vishny, 2000; Song, Wang, & Cavusgil,
firm performance (Douma, George, & Kabir, 2006; Aggarwal et al.,
2015). The Chinese institutional environment is characterized by weak
2011), and ownership (Leuz, Lins, & Warnock, 2009). The relationship
investor protection, concentrated ownership structures, and high levels
between foreign institutional investment and corporate dividend policy
of government and political influence (Claessens, Djankov, & Lang,
has received less attention. This oversight is remarkable because
2000; Chen, Chen, Schipper, Xu, & Xue, 2012; Fan
dividends, unlike accruals, cannot be easily falsified or manipulated. & W
ong, 2002 ). As a result, the controlling shareholder (usually a
Therefore, they are an attractive variable to study, particularly in
state-owned entity) of a Chinese listed firm is likely to have both the
emerging markets, which are often characterized by unreliable
power and the incentive to divert corporate resources from minority
accounting and auditing practices.1
shareholders and extract private benefits of control. Unlike their local
counterparts, foreign institutional investors do not face political
Second, in the small but growing literature on the impact of foreign
pressure to facilitate state shareholders’ expropriation of wealth from
institutional investment on corporate dividend policy in emerging
minority shareholders (Firth, Lin,
markets, existing studies imply that foreign investors enhance & Z
ou, 2010 ; Huang & Zhu, 2015) and are unlikely to have potential
monitoring and improve corporate governance quality in countries that
business ties with the listed firms they have invested in (Firth et al.,
have poorly developed legal institutions (Baba, 2009; Desender et al.,
2016). Thus, foreign institutional investors are independent and can
2014; Jeon et al., 2011; Kim et al., 2010). While these insights are
therefore theoretically be more effective at monitoring controlling
valuable, they are mainly based on studies focused on Japan and
shareholders. Research shows that dividends play an important role in
Korea. To the best of our knowledge, our study is the first to examine
disciplining managers and mitigating agency conflicts between insiders
the impact of foreign institutional investors on dividend policy in China,
(e.g., managers and controlling share-holders) and outside minority
where foreign investors’ access to local securities markets is more
shareholders. Dividend payouts to shareholders reduce the amount of
tightly restricted and a relatively high risk of expropriation by controlling
cash under insiders’ control and consequently limit the opportunities
shareholders exists. Recently, H
uang and Zhu (2015) find that foreign
for insiders to spend cash inefficiently or divert it to themselves at the
institutional investors may play a beneficial role in limiting expropriation
expense of outside shareholders (Easterbrook, 1984; Jensen, 1986).
by controlling shareholders in China. Consistent with Huang and Zhu
Thus, we argue that foreign institutional investors can induce
(2015), our findings support a positive influence of foreign managers to pay out dividends.
shareholding on dividend payments. More importantly, our findings
suggest that foreign investors tend to prefer investing in Chinese listed
In addition to the proactive role of monitoring managers, dividends
firms that already have more generous payout policies. In this way, our
can function as a substitute for poor legal protection of shareholders
study complements the existing literature on the impact of foreign
(La Porta et al., 2000). This is particularly relevant in the Chinese
institutional invest-ment in emerging markets and presents an
setting. Foreign institutional investors investing in Chinese listed firms
alternative interpreta-tion to the one offered by Huang and Zhu (2015).
experience significant information asymmetry because of the
geographical, institutional, and cultural distance they face. However,
they are typically large and sophisticated institutions with resources
Finally, while prior studies examining the relationship between
and skills that allow them to collect value-relevant information and
dividend policy and institutional ownership focus mainly on the U. S.
invest their holdings prudently (Gul, Kim, & Qiu, 2010). Having limited
and other developed markets (Grinstein & Michaely, 2005; Short,
knowledge of local conditions, such investors may be particularly
Zhang, & Keasey, 2002),2 the potential impact of institutional
sensitive to signals of firm governance quality. They will prefer to
ownership in China has been comparatively neglected. Given the
invest in well-managed firms that have a reputation for equitable
continuous growth of China’s economy and ongoing development of its
treatment of shareholders. Following this line of thought, we argue that
capital market, the role played by institutional investors in China can
Chinese listed firms can use dividend payouts to establish a reputation
no longer be ignored. Recently, F
irth et al. (2016) find that mutual
for moderation in expropriating the wealth of outside investors and
funds, an important type of institutional investor, influence firms to pay
thereby attract foreign institutional investment.
higher dividends in China. Although the findings are interesting, they
do not differentiate the effects of foreign and domestic investors. This
Using data from 1592 publicly listed Chinese firms during the
study complements Firth et al. ( 2016) by showing that foreign
period of 2003–2013 (14,706 firm-year observations), we find a
institutional investors investing in Chinese listed firms under the quota
significant positive association between foreign shareholding and
scheme have different incentives to monitor firms and influence their
dividends. Moreover, our simultaneous equation models using the
dividend payouts, as compared to their domestic counterparts.
generalized method of moments (GMM) method show that foreign
Moreover, foreign institutional investors are more attracted to dividend
shareholding influences corporate dividend payouts, and vice versa.
increases than their domestic counterparts.
Thus, in an institutional environment with weak investor protection,
foreign shareholding and dividends are jointly deter-mined and
The remainder of this paper proceeds as follows. In Section 2 we
influence each other in a positive manner. Furthermore, we study the
review prior literature on dividend policy and develop our
relationship between changes in dividends and changes in foreign
shareholding. We find that firms that increase their dividend payments
wil subsequently have a larger propor-tion of foreign institutional
shareholdings. By contrast, there is no significant effect of a change in
1 In China, for example, there have been several examples of publicly listed firms
the shareholding of foreign institutional investors on subsequent
having used inaccurate bank statements (with or without col usion of the bank in
question) to deceive auditors. In fact, contrary to intuition, faking cash balances seems
dividend payments. This suggests that foreign investors self-select into
to be one of the easier ways to distort corporate accounts. For an egregious example, firms paying higher dividends.
see Deloitte’s resignation letter to Longtop Financial Technologies from May 2011,
which is registered with the SEC:
http://www.sec.gov/Archives/edgar/ d
ata/1412494/000095012311052882/d82501exv99w2.htm (retrieved on January
This study contributes to the literature in several ways. First, while 31, 2016).
a substantial body of literature exists on the impact of international
2 We thank an anonymous referee for drawing our attention to the relevance of these articles
ownership on corporate governance, prior research to our study. lOMoARcPSD|45316467 818
L. Cao et al. / International Business Review 26 (2017) 816–827 hypotheses. In Section 3
we introduce the research design and
minority shareholders (Du & Dai, 2005; Faccio et al., 2001; Song et al.,
methodology. Results are presented in Section 4, and Section 5
2015). Outside investors are at a disadvantage in benefiting from their concludes.
investment because insiders prefer to keep cash in the firm or divert it
to themselves. Dividends, which are shared by all investors on a pro
2. Foreign institutional investors and corporate governance in China
rata basis, thus mitigate the agency costs associated with the
deployment of free cash flow (Easterbrook, 1984; Faccio et al., 2001; Jensen, 1986).
Despite increasing direct investment in China by foreign
Given that managers naturally prefer to retain surplus cash instead
companies, foreign portfolio investors were legally prohibited from
of paying out dividends, the question arises as to who can induce them
investing in the Chinese domestic stock markets until November 2002,
to pay dividends. Grinstein and Michaely ( 2005) argue that institutional
when the QFII scheme opened the A share market to foreign
investors typically have large amounts at stake and are wel informed,
institutional investors that were officially approved by the CSRC. Since
and hence have incentives to devote resources to monitoring and to
then, the rapidly growing Chinese economy has attracted a wide press for dividend payments. F
irth et al. (2016) argue that institutional
variety of institutional investors—investment banks, pension funds,
investors can communicate with management teams directly and
insurance firms, sovereign wealth funds, and others—from around the
exercise voting rights during shareholder meetings. Alternatively, they
world. Foreign institutions that attain QFII status are granted a quota
can influence a firm’s dividend payout by the implicit threat of selling
that they can use to buy A shares (i.e. domestically traded shares
their shares. Empirical evidence with respect to the relationship
denominated in domestic currency) as wel as other domestic financial
between institutional investors and dividends is mixed. For example,
products.3 Foreign institutional investors approved so far are
Grinstein and Michaely (2005), using a sample of public U.S. firms, do
exclusively large, reputable international investors such as UBS,
not find empirical support that institutions cause firms to increase
Morgan Stanley, Nomura Holdings, Goldman Sachs, Citigroup, HSBC,
payouts. Short et al. (2002), using a sample of U.K. public firms, find a
Deutsche Bank, and so forth. The system has been gradually
positive association between institutional investment and dividend
expanded, and by the end of 2015, 294 international financial payments. F
irth et al. (2016) examine this relationship in the China institutions had QFII status.
setting and find that only one class of institutional investors – mutual
In China, the privatization of state-owned companies has resulted
funds – influence firms to pay higher cash dividends. While these
in a prevalence of concentrated ownership in listed firms (Chen, Jian,
studies provide important insights, less is known about the role of
& Xu, 2009; Sun & Tong, 2003; Wang & Wong, 2003). For example,
foreign institutional investors in the corporate governance of listed
Chen et al. (2009), in an examination of 1271 firms listed on the firms in China.
Shanghai and Shenzhen stock exchanges from 1990 to 2004, find that
the controlling shareholder holds around 44% of the shares on
average. The concentrated ownership structure allows a controlling
As the institutional framework in China is characterized by weak
shareholder (usually a state-owned entity) to dominate the board of
investor protection, concentrated ownership structures, and relatively
directors and the top management team (Chen, Firth, Gao, & Rui,
inexperienced individual investors, insiders often expropriate wealth
2006). In addition, legal institutions for the enforce-ment of ownership
from minority shareholders (including foreign shareholders). Moreover,
rights remain relatively underdeveloped, though the degree of
most Chinese listed firms are ultimately controlled by state-owned
underdevelopment varies by region (Li & Qian, 2013). The
entities that do not consider dividends to be the main source of return
combination of a concentrated ownership structure and weak
received from listed firms.5 Therefore, Chinese listed firms generally
governance mechanisms enables controlling shareholders to
do not have much incentive to keep dividends high in order to transfer
expropriate company wealth at the expense of minority shareholders
wealth to all shareholders. We argue that foreign institutional investors
(Berkman, Cole, & Fu, 2009; Cheung, Jing, Lu, Rau, & Stouraitis,
are more independent of management and controlling shareholders
2009; Clark, 2003; Du & Dai, 2005; Faccio et al., 2001).
than their local counterparts, who often face political pressure to
facilitate state shareholders’ expropriation of company wealth (Firth,
Lin, & Zou, 2010) or have potential business ties with the listed firms
3. Foreign institutional investors and dividends
they have invested in (Firth et al., 2016). Therefore, they have a
heightened incentive to monitor controlling shareholders and push for
The finance literature attempts to explain the puzzle of corporate
equitable treatment of all shareholders. Consistent with this argument,
dividend policy primarily by using two lines of reasoning: agency and
previous studies present evidence that the presence of foreign
signaling theories (see Baker, 2009, for an overview of different
institutional investors can be an effective way to enhance monitoring
schools of thought on dividend policy).4 In this section we develop
(Gul et al., 2010; He, Li, Shen, & Zhang, 2013). For instance,
hypotheses from both perspectives. A
ggarwal et al. (2011) find that international institutional investment
leads to subsequent improvement in governance in a broad range of
3.1. An agency perspective
countries. More specifically, B
aba (2009) finds that foreign institutional
ownership is associated with higher dividends in Japan, and Kim et al.
Agency theory acknowledges the existence of conflicts between ( 2010) and Je
on et al. (2011) report similar findings for South Korea.
outside investors and insiders (managers, controlling share-holders) of H
uang and Zhu (2015) and Han et al. (2015) find that QFIIs help raise
a firm. Research shows that firms in developing countries are
the standards of corporate governance
especially subject to the principal–principal agency problem that arises
from the conflicts between controlling and
3 See Walter and Howie (2006), Ch. 11, for details on the QFII scheme.
4 Another explanation of dividend policy is tax incentives (see e.g., Dahlquist &
5 Taxes paid by listed firms are significantly higher than dividends. For example,
Robertsson, 2001). Since QFIIs are currently exempt from business taxes on capital
from 2006 until 2010, firms control ed by the State-owned Assets Supervision and
gains and some of them are entitled to preferential tax treaty benefits for withholding
Administration Commission (SASAC) paid 168.6 bil ion yuan in total dividends but 5
taxes of dividend, tax-based explanations of dividend behavior are less relevant in our
tril ion in taxes (South China Morning Post, February 23, 2011: “State firms to hand context.
over more profits to Beijing”). lOMoARcPSD|45316467
L. Cao et al. / International Business Review 26 (2017) 816–827 819
and stabilize the capital market in China. Thus, based on the existing
money will not be expropriated (Grinstein & Michaely, 2005; Jiraporn &
literature, there is reason to predict that foreign institutional investors in
Ning, 2006; Kim & Yi, 2015). In light of the above discussions, we
China make an active effort to reduce information asymmetry, promote
propose the following hypothesis:
dividend payments, and reduce management’s ability to squander
firms’ resources. This leads to the following hypothesis:
Hypothesis 2. All else equal, firms that pay higher dividends attract
greater foreign institutional holdings.
Hypothesis 1. All else equal, greater foreign institutional holdings lead to 4. Methodology
firms paying higher dividends. 4.1. Data and sample
3.2. A signaling perspective
The data set consists of all nonfinancial firms listed on the
Our second hypothesis concerns the impact of dividends on foreign
Shanghai and Shenzhen stock exchanges during the time period of
institutional ownership. Signaling theories are based on the
2003–2013. We retrieve accounting and shareholder information from
assumption that firm insiders (e.g., managers or controlling
the Chinese CSMAR database using the following criteria. First, we
shareholders) know more than outsiders (e.g., minority share-holders)
select all firms listed on the Shenzhen and Shanghai stock exchanges
about a firm’s growth opportunities, governance quality, and so forth.
for which complete information is available for 2003–2013. This leads
In the context of information asymmetries between insiders and
to a total of 1645 firms with 15549 firm-year observations. Second, we
outsiders, firms can demonstrate their commitment to good corporate
exclude financial firms (275 firm-year observations) because they may
governance standards by consistently and voluntarily paying high
have different incentives for paying dividends. Third, we exclude firms
dividends (Miller & Rock, 1985). Grinstein a nd Michaely (2005) argue
that are listed in CSMAR as being ultimately foreign-controlled (568
that institutional investors prefer dividends to retained earnings as
firm-year observa-tions), reasoning that they are effectively foreign
firms paying stable dividends are considered prudent investments.
subsidiaries and cannot be compared to ordinary listed firms with
Thus, firms paying stable dividends are able to attract institutional
respect to the impact of foreign ownership. Applying these criteria
investors and raise external finance. Moreover, many firms maintain a
results in a final sample of 1592 publicly listed Chinese firms for a total
regular pattern of dividend payments because investors prefer such
of 14706 firm-year observations.
regularity for psychological reasons (Graham & Kumar, 2006; Shefrin,
2009). In particular, firms operating in an environment of relatively
weak legal protection of shareholders can use dividends as a
4.2. Variable measurement
substitute for such protection (La Porta et al., 2000). The empirical
research based on data from the U.S. and other developed markets 4.2.1. Dividends
does not support the signaling role of dividends in attracting
In this study we focus on cash dividends and measure corporate
institutional investors. For example, G
rinstein and Michaely (2005) find
dividend policy based on two variables in our main analysis: dividend
no evidence that U.S. public firms that face more asymmetric
and dividend payer. Dividend is the ratio of dividends to total assets,
information (small firms and high market-to-book firms) are able to use
similar to the measurement used in Ben-Nasr (2015) and Grinstein
dividends to attract institutional investors. On the contrary, they find
and Michaely (2005). Following the definition used by Firth et al.
that institu-tional investors as a group reduce their holdings in firms ( 2016) and B
aba (2009) among others, Dividend payer is a dummy
that increase their dividend payout. One emerging-market study by
equal to one if the firm pays dividends, and zero otherwise. In the
Fairchild, Guney, and Thanatawee (2014), using a sample of widely
robustness check, we add two additional measures: dividend yield and
held Thai firms, find little support for the signaling hypothesis.
dividend payout. Similar to Dahlquist and Robertsson (2001), we define
Dividend yield as common dividends divided by the market value of
equity. Similar to Adjaoud and Ben-Amar (2010), Dividend payout refers
to the payout ratio, that is, dividends divided by net earnings. In
Research has shown that the signaling perspective is more
addition to cash dividends, open-market share repurchases have
relevant in emerging markets like China where formal legal protection
become an increasingly popular method during the last decade for
of minority shareholders is imperfectly developed (La Porta et al.,
firms in many countries to return excess cash to shareholders. We 2000). For example, S
u et al. (2014) suggest that Chinese firms with follow
political connections pay higher dividends, signaling to investors the
expected future profitability resulting from privileged access to key
resources. Compared with their local counterparts, foreign institutional
investors face geographical, institutional, and cultural distance, which
6 The approach taken to share repurchases by the Company Law of China in both
its original version from 1993 and its updated 2005 edition is that the law prohibits firms
magnifies the informa-tion asymmetry vis-à-vis management and
from buying their own shares back by default in accordance with a principle of capital
controlling share-holders (Buckley, 1997; Desender et al., 2014; Leuz
preservation (Gu, 2010; pp 279–280). However, the Company Law does permit firms to
et al., 2009). Moreover, because they hold a relatively small stake,
repurchase shares in special circumstances (i.e., see Article 149 of the 1993 Company
foreign institutional investors’ ability to effectively monitor management
Law; Article 143 of the 2005 Law). In practice the attractiveness of buybacks is sharply
limited by several factors. First, firms are not al owed to hold treasury shares with a
may be limited (Douma et al., 2006). Furthermore, foreign institutional
view to sel ing the shares back to the market later. Since issuing shares is associated
investors in China are typically large and sophisticat-ed institutions
with considerable regulatory and bureaucratic hurdles in China, very few firms that
with resources and skil s that allow them to collect value-relevant
have managed to issue shares in the first place are interested in undoing the process
information and invest their holdings prudently (Gul et al., 2010). Thus
through a repurchase (Zhou & Zeng, 2003). Second, since share repurchases entail a
reduction of the company’s registered capital, such transactions are subject to strict
they will be purposefully seeking assurances that they will not be
creditor protection provisions under the Company Law, which makes them more
harmed by their disempowered status as minority shareholders.
complicated to implement than dividends (The creditor provisions are in Article 178 of
Having limited knowledge of local con-ditions, such investors may be
the 2005 Law). As a result of these impediments, share repurchases were hardly ever
particularly sensitive to signals of firm governance quality. A historical
used by Chinese listed firms as an alternative to dividends during the period studied
here, although they were occasional y used for the purpose of changing a company’s
pattern of generous and stable dividend payments may help to share class structure. See G
u (2010, p. 260) on the buyback of B shares and Walter
convince the investors that their
and Howie ( 2006, p. 180) on the buyback of nontradable state shares. lOMoARcPSD|45316467 820
L. Cao et al. / International Business Review 26 (2017) 816–827
previous empirical studies on the dividend policy of Chinese listed
generated from their operating activities to finance their positive net
firms (Chen et al., 2009; Su, Fung, Huang, & Shen, 2014; Zhang,
present value projects. Therefore, they are less likely to pay dividends.
2008) in not making any adjustments for the impact of share
We include two variables to measure a firm’s growth opportunities.
repurchases on dividend policy because share repurchases were a
Market to book is the ratio of the market value of equity to the book
highly uncommon means of disbursing cash to shareholders during the
value of equity, as is used in B
aba (2009) and Jeon et al. (2011), time period we are studying.6
among others. This variable has been found to be negatively
associated with dividend policy in the literature (e.g., Adjaoud & Ben-
4.2.2. Foreign shareholding
Amar, 2010; Chen et al., 2009). The second variable representing
We identify foreign shareholding by matching the official list of
growth opportunities is Intangible, which is calculat-ed as intangible
QFIIs with the firm’s ten largest shareholders collected from CSMAR
assets divided by total assets.
database. Restricting attention to QFIIs, as opposed to other foreign
Second, larger and more profitable firms are expected to pay
investors, has the advantage of avoiding including industrial investors
higher dividends (Adjaoud & Ben-Amar, 2010; Holder, Langrehr, &
in the dataset. This is important because such investors may be driven
Hexter, 1998). Therefore, we include Firm size, which is measured by
by strategic interests that are irrelevant to institutional investors (and to
the natural logarithm of total assets, following Adjaoud and Ben-Amar
this study). We used the official list of QFIIs which was published on
( 2010) and Baba (2009), among others. We also control for Cash
the website of the CSRC in July, 2014. The list includes the English
holding, which is calculated by cash and cash equivalents divided by
and Chinese names of all institutions currently approved as QFIIs
total assets, similar to the measurement used in Jeon e t al. (2011) and
along with the date of approval. In addition to strictly foreign
Shao, Kwok, and Guedhami (2013). A firm’s cash holding is likely to
institutions, the list also comprises institutions from Hong Kong,
influence its ability to pay dividends. The same is true of ROE, which is
Macau, and Taiwan. However, the list does not include institutions that
the after-tax return on equity, following Adjaoud and Ben-Amar (2010)
held QFII status in the past but subsequently lost it for some reason and Fairchild et al. (2014).
(e.g., Lehman Brothers, which went bankrupt in 2008). In order not to
Third, highly leveraged firms may pay lower dividends. Creditors
overlook institutions that obtained QFII status in the early years of the
may limit dividend payouts in order to protect their own interests in a
QFII scheme but are no longer on the official list, we checked the
firm. Moreover, large creditors are able to monitor the behavior of
official QFII list published in April, 2006, available in Walter and Howie
management, which alleviates potential free cash flow problems and
(2006). Our final list of foreign institutional investors, then, consists of
the necessity of paying dividends. Therefore, we control for Leverage,
QFIIs that are either on the official list (2014 version), or the official list
which is total liabilities divided by total assets, similar to the
(2006 version) or both. Moreover, we have assigned QFII status not
measurement used in Shao et al. (2013).
only to entities that match the official name (in either English or
Chinese) of a QFII exactly but also to affiliated entities, in recognition
Fourth, prior research has shown that managerial ownership helps
of the fact that the names of particular institutional shareholders are
to resolve the agency conflicts between outside shareholders and
not always recorded in the same way and with the same level of detail
managers. Consistent with this argument, Agrawal and Jayaraman in CSMAR.
( 1994) find that managerial ownership and dividends are substitute
mechanisms for controlling the agency costs of free cash flow. When
In this study, Foreign shareholder is a dummy variable equal to one
managerial ownership is high, there is a high goal alignment between
if at least one of the ten largest shareholders is foreign, and zero
managers and shareholders, making dividends less necessary.
otherwise. Foreign share is the proportion of shares held by foreign
However, several scholars argue that managers will become
shareholders identified as described above; if a firm has more than
entrenched above certain ownership levels (Farinha, 2003), and
one foreign shareholder among its ten largest, the percentages for
increase dividend payments if they feel restricted in selling their shares
these shareholders are added up. In the robustness check, we
in the company (Firth et al., 2016). Therefore, similar to Firth et al.
introduce a dummy variable (High foreign) equal to one if the foreign
( 2016) and others, we control for Managerial ownership (Managerial),
ownership of a given firm is higher than our sample median foreign
which is the proportion of shares hold by top managers of the firm. ownership and zero otherwise.
Fifth, prior literature suggests that state ownership positively
4.2.3. Control variables
influences a firm’s dividend policy. For example, Adjaoud and Ben-
We include firm-specific control variables that have potential A
mar (2010) argue that in firms with partial state ownership, paying
influence on dividend policy. First, we control for a firm’s growth
dividends will indicate to the shareholders that the privatized firm is
opportunities. When firms grow rapidly, they need funds performing well. F irth et al. (2016) argue that Table 1
Descriptive statistics, multicollinearity indices, and Pearson correlations. Mean SD VIF 1 2 3 4 5 6 7 8 9 10 11 12 1. Dividend 0.001 0.016 1.00 2. Dividend payer 0.552 0.497 0.59 1.00 3. Foreign shareholder 0.127 0.334 1.62 0.14 0.14 1.00 4. Foreign share 0.002 0.008 1.57 0.13 0.09 0.60 1.00 5. Market to book 3.396 4.034 1.08 0.01 0.13 0.02 0.01 1.00 6. Firm size 21.627 1.275 1.20 0.09 0.33 0.21 0.13 0.24 1.00 7. Cash holding 0.159 0.118 1.17 0.27 0.20 0.01 0.01 0.06 0.09 1.00 8. ROE 0.057 0.225 1.04 0.21 0.24 0.06 0.06 0.11 0.10 0.12 1.00 9. Leverage 0.528 0.255 1.13 0.35 0.25 0.05 0.02 0.04 0.08 0.31 0.03 1.00 10. Intangible 0.045 0.058 1.04 0.04 0.10 0.00 0.03 0.08 0.09 0.14 0.05 0.02 1.00 11. Managerial share 0.029 0.100 1.19 0.12 0.11 0.03 0.03 0.06 0.13 0.15 0.05 0.13 0.02 1.00 12. State-owned 0.647 0.478 1.23 0.01 0.06 0.08 0.04 0.11 0.25 0.07 0.03 0.01 0.04 0.37 1.00
N = 14706. Bold type denotes significance at the 0.1% level. See A
ppendix A for variable definitions. lOMoARcPSD|45316467
L. Cao et al. / International Business Review 26 (2017) 816–827 821 Table 2
Comparison of dividend-paying firms and non–dividend-paying firms. Paying firms Nonpaying firms
Mean differences (t-statistic)
(dividends > 0; N = 8114)
(dividends = 0; N = 6592) Mean Median SD Mean Median SD Dividend 0.019 0.013 0.017 0.000 0.000 0.000 87.500*** Foreign shareholder 0.167 0.000 0.373 0.078 0.000 0.269 16.275*** Foreign share 0.003 0.000 0.009 0.001 0.000 0.007 11.464*** Market to book 2.931 2.251 2.232 3.969 2.570 5.439 15.639*** Firm size 22.004 21.847 1.258 21.163 21.079 1.136 42.107*** Cash holding 0.181 0.151 0.122 0.133 0.107 0.107 25.092*** ROE 0.105 0.092 0.071 0.003 0.027 0.317 29.727*** Leverage 0.471 0.481 0.184 0.598 0.576 0.308 31.004*** Intangible 0.040 0.025 0.052 0.052 0.030 0.065 12.713*** Managerial 0.039 0.000 0.114 0.016 0.000 0.076 13.761*** State-owned 0.671 1.000 0.470 0.617 1.000 0.486 6.802***
*** Denote significance at the 0.1% level. See A
ppendix A for variable definitions.
the state, as the ultimate controlling shareholder of many firms in
by dividend (models 1 and 2) and dividend payer (models 3 and 4).
China, tends to press for higher cash dividends in order to reduce the
Because dividend is censored at zero for firms that do not pay
free cash flows under managers’ discretion. On the other hand, state-
dividends, we use tobit regression models for examining the impact of
owned firms have political objectives to satisfy and may not monitor
foreign ownership on dividend yield. Tobit regression uses a maximum
managers based on the achievement of value-maximizing objectives
likelihood estimation designed for situations in which the dependent
(Ben-Nasr, 2015; Firth et al., 2016). According to agency theory,
variable is constrained in some way (Amemiya, 1984). Moreover, we
managers of state-owned firms may have incentives to keep cash
run probit regression models when dividends are measured by dividend
within the firm for their own benefits. Consistent with the predictions of
payer, which takes the value of one if the company pays dividends in
agency theory, Ben-Nasr (2015), using a sample of newly privatized
the particular year, and zero otherwise. Foreign shareholding is
firms from 43 countries, find evidence that dividend payout is
measured by Foreign shareholder (models 1 and 3) and Foreign share
negatively related to government ownership. Thus, similar to previous
(models 2 and 4). All regressions include year dummies and industry
studies (Ben-Nasr, 2015; Firth et al., 2016), we control for State-owned,
dummies. Similar to previous dividend studies (Adjaoud & Ben-Amar,
which is a dummy variable equal to one if the firm is ultimately
2010; Baba, 2009), all regressions reported in our main analysis are
controlled by the state. Finally, we include year and industry dummies.
estimated using random effects to adjust standard errors for clustering
Our industry controls are based on the 13-industry official classification at the firm level.
announced in 2001 by the Chinese Securities Regulatory Commission (CSRC). T
able 3 reports the regression results. Models 1 and 2 use dividend,
while models 3 and 4 use dividend payer to measure a 5. Results
5.1. Descriptive statistics Table 3
Foreign shareholding and dividend policy. T
able 1 presents descriptive statistics and correlations for the data Dependent variables Dividend Dividend payer
set. Among our firm-year observations,12.7% have at least one foreign Model 1 Model 2 Model 3 Model 4
institutional investor among the ten largest shareholders. Firms pay Foreign shareholder 0.002*** 0.172**
dividends in 55.2% of the observations, and the mean dividend to total (3.508) (3.241)
asset ratio is 0.1%. As expected, the firm’s dividend policy (as Foreign share 0.088*** 6.024*
evidenced by dividend and dividend payer) is positively correlated with (4.246) (2.430)
foreign shareholdings. Moreover, all the variance inflation factors (VIF) Market to book 0.000 0.000 0.026*** 0.025*** ( 0.642) ( 0.629) ( 3.598) ( 3.531)
of our explanatory variables are below 2, indicating that Firm size 0.007*** 0.007*** 0.798*** 0.802***
multicollinearity is not a problem. Table 2 compares dividend-paying (25.402) (25.549) (26.488) (26.709)
and non–dividend-paying firms. As one would expect, non–dividend- Cash holding 0.021*** 0.021*** 1.410*** 1.399***
paying firms are much less profitable, hold less cash and smaller in (11.903) (11.906) (7.633) (7.584)
size than dividend-paying firms. Non–dividend-paying firms also have ROE 0.062*** 0.062*** 3.625*** 3.625*** (38.257) (38.204) (25.034) (25.029)
significantly less foreign ownership, but higher leverage and more Leverage 0.060*** 0.060*** 3.709*** 3.720***
growth potential than dividend-paying firms. ( 43.077) ( 43.195) ( 26.086) ( 26.180) Intangible 0.017*** 0.017*** 1.912*** 1.920*** ( 4.261) ( 4.252) ( 4.745) ( 4.766)
5.2. Regression models examining the association between foreign Managerial 0.028*** 0.028*** 2.580*** 2.579*** (9.629) (9.657) (8.740) (8.741)
shareholding and dividends State-owned 0.000 0.000 0.025 0.027 (0.020) (0.091) (0.405) (0.442)
We first investigate whether there is a significant association Year dummies Included Included Included Included
between foreign shareholding and dividends using the following Industry dummies Included Included Included Included equation: Wald chi-square statistic 19094*** 19097*** 1625*** 1623*** No. of observations 14706 14706 14706 14706
Dividend j;t ¼ G0þg1Foreign shareholdingj;tþControlsj;t
This table presents the regression results for dividend policy and foreign shareholding.
þ Dummy ðindustry; yearÞ þ e
Tobit regression models were used for examining the impact of foreign ownership on j;t ð1Þ
Dividend, while probit regression models were used for examining the impact of foreign
where j stands for the jth firm and t for time. Controls stand for all the
ownership on Dividend payer. *, **, *** denote significance at the 5%, 1%, and 0.1%
control variables. e is the error term. Dividends are measured
levels, respectively. T-statistics are reported in parentheses. See A ppendix A for variable definitions. lOMoARcPSD|45316467 822
L. Cao et al. / International Business Review 26 (2017) 816–827
firm’s dividend policy. As shown in models 1 and 2, Chinese listed
variable in the system to receive the prediction of the endogenous
firms pay higher dividends when foreign institutional investors are
variables. The values of partial R2 of excluded instruments are 0.349
present and when such investors hold more shares. Models 3 and 4
and 0.350 for Foreign share and Dividend respectively. The F-statistic is
suggest that Chinese listed firms are more likely to pay dividends
3559 (p = 0.00) for Foreign share and 3550 (p = 0.00) for Dividend,
when foreign institutional investors are present and when such
showing the strength of the instruments. In addition, Pagan-Hall
investors hold more shares. All of this evidence supports a positive
general test statistics are significant (2343.893,
association between foreign institutional shareholding and divi-dend
p = 0.00; 2054.937, p = 0.00 for Foreign share and Dividend
payments. Results for control variables are generally consistent with
respectively), suggesting the presence of heteroscedasticity. Thus, we
prior literature on dividend policy (see Baker, 2009; for a
use GMM estimation which uses a weighting matrix taking account of
comprehensive overview). We find that firms are more likely to pay
temporal dependence, heteroskedasticity or autocorre-lation (Hansen,
dividends and to pay higher dividends when they are larger and when
1982). We tried to measure dividends in different ways (i.e. dividend;
they have larger cash and better past perfor-mance. Firms are less
dividend yield; dividend payout). However, Hansen J statistic tests on the
likely to pay dividends when their financial leverage is higher and when
appropriateness of over-identifying restrictions are clearly
they have potential growth opportunities, as evidenced by larger
unsatisfactory when dividend yield and dividend payout were used.
intangible assets and higher market-to-book value. Finally, there is a
Therefore, we use dividend, and Foreign share in our simultaneous
positive association between managerial ownership and dividend
equation models. Hansen J statistic tests of both equations show that
payments, indicat-ing that entrenched managers prefer dividend
overidentifying restrictions are valid (1.915, p = 0.167; 0.316, p = 0.574 payments than capital gains.
for equations 2 and 3 respectively), thus all the instruments identify the
same vector of parameters (Parentea & Silvac, 2012). Table 4 presents the results.
5.3. Simultaneous equation models
We find that firms with higher foreign shareholding pay more
dividends and vice versa. This indicates that foreign institutional
An important concern is the endogeneity problem arising from
investors choose to invest in firms with higher dividends, and their
omitted firm-specific variables that are likely to impact both foreign
shareholdings can promote the firms’ dividend payments. There-fore,
shareholding and dividend policy. To deal with the potential
foreign institutional investors’ investment choices and Chinese listed
endogeneity, we investigate the interrelationship be-tween foreign
firms’ dividend decisions may be jointly determined and influence each
shareholding and dividends in a system of two equations: other in a positive manner.
5.4. Changes in foreign shareholding and changes in dividends
Dividendj;t ¼ A0;jþa1;jForeign shareholdingj;tþa2;jDividendj;t 1
þ a3;jInvestmentj;t 1 þ Controlsj;t þ Hj;t
Another important concern is whether foreign shareholding ð2Þ
changes drive dividend changes or the reverse holds true. To address
this issue, we study the relationship between the changes
Foreign shareholdingj;t ¼ B0;jþb1;jDividendj;t Table 4
þb2;jForeign shareholdingj;t 1 þ b3;jIndexj;t 1 þ Controls
Results of GMM of a simultaneous equation system model. j;t þ E Dependent variables Dividend Foreign share j;t ð3Þ
where j stands for the jth firm and t for time. Controls stand for all the Model 1 Model 2
control variables discussed above. The error terms for the two Foreign share j,t 0.070**
equations are H and E respectively. Each equation contains one of our (2.994)
endogenous variables as dependent variable, and the other one as Dividend j,t 1 0.495***
explanatory variable, along with exogenous variables and control (34.703)
variables. In addition to lag-terms of the dependent variables, we Foreign share j,t 1 0.588*** (16.900)
incorporate lagged investment (Investmentj,t-1) into dividend decisions, Dividend j,t 0.059***
and lagged Marketization Index of the province where a firm is (6.201) Market to book registered (Index j,t 0.000* 0.000
j,t-1) into foreign shareholding decisions. The finance (1.972) ( 0.039)
literature suggests that firms with higher investment in tangible assets Firm size j,t 0.001*** 0.000***
experience higher earnings subse-quently, leading to higher dividend (8.075) (3.385)
payments (see Lee, Liang, Lin, & Y ang, 2016 for a summary). Cash holding j,t 0.011*** 0.001 (9.597) ( 1.826)
Investment is measured by net property, plant and equipment over total ROE
assets, obtained from the Chinese CSMAR database. Marketization j,t 0.006*** 0.000 (17.786) (0.087)
Index (Index) is widely used to measure the financial development of Leverage j,t 0.008*** 0.000*
provinces in China based on five indicators: the role of government, ( 19.236) (2.562)
economic structure, free inter-regional trade, development of factor Intangible j,t 0.000 0.001
market, and legal framework (Fan et al., 2011; Wang et al., 2016). We ( 0.164) (0.961)
choose this variable as an instrument because a rich province may Managerial j,t 0.004** 0.001* (2.614) ( 2.462)
attract more foreign institutional investors as they are able to offer State-owned j,t 0.000 0.000
generous fiscal incentives to foreign investors with more capital left at ( 0.160) (1.179) their disposal. Year dummies Included Included Industry dummies Included Included
Following Lee et al. (2016), we perform the first-stage F-statistic to R2 0.494 0.369 No. of observations 13296 13213
test whether our instruments are weak and then examine the presence of heteroscedasticity using P
agan and Hall (1983)’s test. The
This table presents the GMM regression results of a simultaneous equation system model for
exogenous variables are regressed on each endogenous
Dividend and Foreign share. *, **, *** denote significance at the 5%, 1%, and
0.1% levels, respectively. T-statistics are reported in parentheses. See A ppendix A for variable definitions. lOMoARcPSD|45316467
L. Cao et al. / International Business Review 26 (2017) 816–827 823
in dividend policy and the changes in foreign shareholdings. This
negative impact on the subsequent changes in the ratio of dividends to
approach eliminates the impacts of time-invariant and unobserv-able total assets.
firm characteristics on the dependent variable, and has been deployed
Models 5–8 conduct change regressions in the reverse direction to
in finance studies (Aggarwal et al., 2011; Firth et al., 2016; Grinstein &
examine if firms with higher dividend payments will attract more foreign
Michaely, 2005). Following the research design used in Firth et al.
shareholding. The dependent variable is the change in a firm’s foreign
( 2016) and Aggarwal et al. (2011), we estimate the following
shareholding from time t-1 to t, where foreign shareholding is equations:
measured by Foreign shareholder and Foreign share. The independent D
and control variables are the same as in Table 3, but measured by
Dividendj t ¼ G0þg1DForeign shareholdingj t 1þDControlsj t 1
changes from time t-2 to t-1. If firms that proactively increase their ; ; ;
þ Dummy ðindustry; yearÞ þ Zj t 1
dividends attract more foreign share-holders, the coefficient of the ; ð4Þ
lagged change in dividends (l1) should be significantly different from
zero, while the same is not true for the coefficient of the lagged change
of foreign shareholding (g1). The results show that the lagged change
DForeign shareholdingj t ¼ L0þL1DDividendj t 1þDControlsj t 1
of Dividend payer is not significant to the subsequent change of foreign ; ; ;
þ Dummy ðindustry; yearÞ þ Uj t 1
shareholding (models 5 and 6). However, models 7 and 8 of Table 5 ; ð5Þ
show that the changes in Dividend from time t 2 to t 1 is significant to
the changes in both Foreign shareholder and Foreign share from time
where j stands for the jth firm and t for time. Controls stand for all
the control variables. Z and U are error terms. T able 5 presents the t
1 to t. These results are more in line with the signaling perspective empirical results. In T
able 5 models 1–4, the dependent variable is the
that firms attract foreign shareholders by paying more dividends.
change in a firm’s dividend policy from time t 1 to t, where dividend
policy is measured by Dividend (models 1 and 3) and Dividend payer
(models 2 and 4). The research variables and control variables are the 5.5. Robustness tests
same as in Table 3, but measured by changes from time t-2 to t-1. If
the increase of foreign shareholding promotes the firm’s subsequent
dividend payments, we would expect the coefficient of the lagged
In this section, we perform a variety of robustness checks of our
main findings. We first check the sensitivity of the results presented in
change of foreign ownership (G1) to be positive and significantly T
able 5 using an alternative measurement of foreign institutional
different from zero, while the same is not true for the coefficient of the
holding, which is a dummy variable (High foreign) equal to one if the
lagged change of dividend (L1). T
able 5 models 1, 3 and 4 show that
foreign ownership of a given firm is higher than our sample median
the changes in foreign shareholding have no impact on the
foreign ownership and zero otherwise. Second, we estimate
subsequent changes in dividend-paying behavior. Furthermore, as
regression models with respect to the relationship between changes in
shown in model 2 of Table 5, the changes in the presence of foreign
dividends and changes in foreign shareholding shareholder have a Table 5
Changes in foreign shareholding and changes in dividends. Dependent variables D(Dividend D(Dividend) D(Dividend D(Dividend) D(Foreign D(Foreign D(Foreign D(Foreign Payer) Payer) Shareholder) Share) Shareholder) Share) Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 D(Foreign Shareholder j, 0.004 0.001* ) t 1 ( 0.311) ( 2.433) D(Dividend Payer j,t 1) 0.011 0.000 (1.279) (1.874) D(Foreign Share j,t 1) 0.621 0.037 (1.139) ( 1.769) D(Dividend j,t 1) 0.936* 0.021** (2.462) (2.792) D(Market to book j,t 1) 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 (0.463) (0.957) (0.460) (0.906) (0.305) (1.591) (0.294) (1.587) D(Firm Size j,t 1) 0.015 0.001 0.015 0.001 0.007 0.000 0.009 0.000 ( 1.233) ( 1.914) ( 1.215) ( 1.955) (0.696) ( 0.642) (0.844) ( 0.400) DCash holding j,t 1) 0.048 0.006*** 0.048 0.006*** 0.007 0.000 0.015 0.000 (0.843) (3.337) (0.835) (3.345) ( 0.156) ( 0.154) ( 0.328) ( 0.374) D(ROE j,t 1) 0.004 0.000 0.004 0.000 0.012 0.000 0.011 0.000 ( 0.609) (0.345) ( 0.603) (0.306) (1.573) ( 0.024) (1.414) ( 0.142) D(Leverage j,t 1) 0.002 0.001 0.001 0.001 0.001 0.000 0.009 0.001 ( 0.056) (1.147) ( 0.041) (1.147) (0.036) (0.639) (0.362) (0.955) D(Intangible j,t 1) 0.177 0.005 0.178 0.005 0.078 0.001 0.076 0.001 (1.610) (1.360) (1.621) (1.382) (0.686) (0.582) (0.662) (0.554) D(Managerial j,t 1) 0.748** 0.000 0.749** 0.000 0.074 0.001 0.069 0.001 (3.102) ( 0.612) (3.107) ( 0.621) ( 0.412) (0.447) ( 0.384) (0.499) D(State-owned j,t 1) 0.002 0.024*** 0.002 0.024*** 0.002 0.000 0.002 0.000 ( 0.088) (3.436) ( 0.097) (3.421) ( 0.117) (0.015) ( 0.122) (0.155) Year Dummies Included Included Included Included Included Included Included Included Industry Dummies Included Included Included Included Included Included Included Included N 11480 11449 11480 11449 11492 11492 11492 11492 Wald chi2 182.376*** 120.153 183.162*** 118.884 189.419*** 127.345*** 190.483*** 129.840***
This table presents the regression results for the relationship between changes in dividend policy and changes in foreign shareholding. *, **, *** denote significance at the 5%, 1%,
and 0.1% levels, respectively. T-statistics are reported in parentheses. See A
ppendix A for variable definitions. lOMoARcPSD|45316467 824
L. Cao et al. / International Business Review 26 (2017) 816–827 Table 6
Panel A: Robustness check using alternative measures of foreign shareholding. Dependent variables D(Dividend Payer) D(Dividend) D(High Foreign) D(High Foreign) Model 1 Model 2 Model 3 Model 4 D(High Foreign j,t 1) 0.016 0.001 (0.936) ( 0.881) D(Dividend Payer j,t 1) 0.007 (1.261) D(Dividend j,t 1) 0.663* (2.228) D(Market to book j,t 1) 0.000 0.000 0.001* 0.001* (0.450) (0.922) (2.224) (2.207) D(Firm Size j,t 1) 0.015 0.001 0.005 0.004 ( 1.215) ( 1.937) ( 0.740) ( 0.581) D(Cash Flow j,t 1) 0.048 0.006*** 0.031 0.037 (0.842) (3.329) ( 1.003) ( 1.179) D(ROE j,t 1) 0.004 0.000 0.006 0.005 ( 0.609) (0.323) (1.160) (0.983) D(Leverage j,t 1) 0.001 0.001 0.001 0.005 ( 0.044) (1.159) ( 0.039) (0.356) D(Intangible j,t 1) 0.178 0.005 0.047 0.045 (1.618) (1.388) (0.666) (0.643) D(Managerial j,t 1) 0.749** 0.024*** 0.031 0.035 (3.105) (3.426) (0.279) (0.313) D(State-owned j,t 1) 0.002 0.000 0.006 0.006 ( 0.093) ( 0.632) (0.461) (0.457) Year Dummies Included Included Included Included Industry Dummies Included Included Included Included N 11480 11449 11492 11492 Wald chi2 182.498 115.935 150.183 152.215
This table presents the robustness check of T
able 5 using alternative measures of foreign shareholding. *, **, *** denote significance at the 5%, 1%, and 0.1% levels,
respectively. T-statistics are reported in parentheses. See A
ppendix A for variable definitions.
Panel B: Robustness check using alternative measures of dividend Dependent variables D (Dividend D(Dividend D (Dividend D(Dividend D(Foreign D(%Foreign D(Foreign D(%Foreign Payout) yield) Payout) yield) Shareholder) Shares) Shareholder) Shares) Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 D(Foreign 0.011 0.001*** Shareholder j,t 1) ( 1.359) ( 3.727) D(Dividend Payout j, 0.024* 0.000 ) t 1 (2.014) (1.844) D(% Foreign Shares j, 0.069 0.042* ) t 1 ( 0.163) ( 2.409) D(Dividend yield j,t 1) 1.048* 0.037*** (2.439) (3.859) D(Market to book j, 0.001 0.000 0.001 0.000 0.000 0.000 0.000 0.000 ) t 1 ( 1.697) ( 0.586) ( 1.726) ( 0.661) (0.343) (1.609) (0.314) (1.599) D(Firm Size j,t 1) 0.011 0.000 0.011 0.000 0.008 0.000 0.007 0.000 ( 1.646) ( 1.263) ( 1.655) ( 1.316) (0.784) ( 0.494) (0.690) ( 0.768) D(Cash Flow j,t 1) 0.016 0.003 0.016 0.003 0.008 0.000 0.010 0.000 ( 0.407) (1.952) ( 0.410) (1.959) ( 0.185) ( 0.173) ( 0.223) ( 0.316) D(ROE j,t 1) 0.000 0.000 0.000 0.000 0.013 0.000 0.011 0.000 (0.008) ( 1.768) ( 0.005) ( 1.805) (1.682) (0.063) (1.419) ( 0.263) D(Leverage j,t 1) 0.037* 0.001 0.037* 0.001 0.001 0.000 0.004 0.000 ( 2.004) (0.970) ( 1.996) (0.969) (0.044) (0.629) (0.162) (0.883) D(Intangible j,t 1) 0.169* 0.003 0.171* 0.003 0.079 0.001 0.072 0.001 (2.219) (0.993) (2.231) (1.024) (0.696) (0.585) (0.634) (0.483) D(Managerial j,t 1) 0.591*** 0.000 0.591*** 0.000 0.069 0.001 0.002 0.000 (3.640) ( 0.090) (3.638) ( 0.105) ( 0.383) (0.482) ( 0.115) (0.029) D(State-owned j,t 1) 0.017 0.015** 0.017 0.015** 0.002 0.000 0.074 0.001 (1.153) (2.926) (1.142) (2.912) ( 0.112) (0.015) ( 0.407) (0.457) Year Dummies Included Included Included Included Included Included Included Included Industry Dummies Included Included Included Included Included Included Included Included N 11450 11480 11450 11480 11492 11492 11492 11492 Wald chi2 263.568 1037.571*** 262.556 1053.978*** 190.279 127.945 191.456*** 129.851***
This table presents the robustness check of T
able 5 using alternative measures of dividends. *, **, *** denote significance at the 5%, 1%, and 0.1% levels, respectively. T-statistics
are reported in parentheses. See A
ppendix A for variable definitions.
using alternative measures of dividend policy: dividend payout and
analyze the relationship between changes in foreign shareholding and
dividend yield. The results of all these analyses (presented in Table 6)
changes in dividends, which assume that firm specific effects are
are in line with the previous results reported in Table 5. Third, in the
uncorrelated with independent variables. As the variable “State-
main analyses we use random effects models to
owned” in the regressions is almost completely time- lOMoARcPSD|45316467
L. Cao et al. / International Business Review 26 (2017) 816–827 825
invariant, we could not estimate fixed effect models. As a robustness
In 2005 the CSRC launched a process of converting nontradable
check, we leave out the variable “State-owned” and estimate fixed
shares into tradable shares, with the end goal of abolishing the
effect models. We also run the regressions without assuming random
nontradable share category entirely by the end of 2006. Chen et al.
effects using robust standard errors to assess the significance of the
( 2009) study the period 1990 to 2004 and note that during that period,
estimated coefficients. The results (available from the corresponding
shares held by governments and state agencies are usually
author) are similar to those reported in the main analyses. Finally, we
nontradable. Thus, controlling shareholders would sometimes prefer
rerun our main analyses using only those firms for which we have data
high dividends as a means of diverting part of the proceeds from
for all the years (2003–2013). The results are consistent.
overpriced IPOs or secondary offerings to themselves since they were
not able to achieve this by selling shares. While we find the arguments of C
hen et al. (2009) intriguing, our sample period starts from 2003,
6. Conclusion and discussion
when controlling shareholders knew that their nontradable shares
would likely become tradable before long, which would limit their
This study investigates the relationship between dividend policy
incentive to pay high dividends for expropriation purposes. Dividends
and foreign institutional shareholding in Chinese listed firms. Using the
are, after all, a relatively inefficient means of expropriation since they
GMM method to deal with the potential endogeneity between foreign
must be shared with minority shareholders.
shareholding and dividends, our simultaneous equations results show
that foreign shareholding influences dividend payments, and vice Moreover, H
uang and Zhu (2015) suggest that QFIIs are more
versa. This finding implies that Chinese listed firms can use dividends
likely than local mutual funds to perform arm’s-length negotiation and
to signal growth opportunities and attract foreign institutional investors.
monitoring in the process of the share structure reform that floats
Foreign institutional investors can also promote dividends in the firms
formerly nontradable shares, to the benefit of all minority shareholders.
in which they hold shares. These findings seem to support dividend
By contrast, we do not find much evidence that foreign institutional
policy explanations from both agency and signaling perspectives.
investors actively increase dividends by changing their shareholdings.
This could be an indication that controlling shareholders expropriate
Furthermore, we investigate whether changes in foreign
wealth from minority share-holders (foreign institutions) once they
institutional ownership over time positively affect subsequent changes
have invested in the firm, which is a significant agency problem in
in dividend payments, or vice versa. We find that changes in dividend
developing countries such as China. Furthermore, foreign
payments over time drive subsequent changes in foreign shareholding,
shareholding and dividend decisions seem to be jointly determined
but that the opposite does not hold true. This seems to support the
and interact with each other in a positive manner. While we make no
signaling perspective, which posits that firms attract foreign investment
claim to know the ultimate truth about the role of foreign institutional
by using dividends to signal their commitment to protecting minority
investors in China, we believe our study is valuable because it
shareholder rights in the absence of effective institutional protections.
provides a different view from the current orthodoxy.
Thus, the changes in foreign institutional investors’ shareholding do
not have much impact on the changes in firms’ dividend policy, but
From a broader perspective, our findings add to the small literature
instead foreign institutional investors self-select into Chinese firms that
on the impact of foreign shareholding in emerging markets (Baba,
already pay high dividends. This finding is in contrast to prior studies of
2009; Buckley, Munjal, Enderwick, & Forsans, 2015; Desender,
emerging markets which suggest that foreign institutional investors
Aguilera, Lópezpuertas-Lamy, & Crespi, 2014; Jeon, Cheolwoo, &
play an active role in enhancing corporate governance (e.g., Baba,
Moffett, 2011; Kim, Sul, & Kang, 2010) by showing that institutional
2009; Desender et al., 2014; Huang & Zhu, 2015; Jeon et al., 2011;
context matters when it comes to predicting the impact of foreign
Kim et al., 2010). One possible explanation is that QFIIs are investors
institutional investment in emerging markets. Sophisticated foreign
who have gone through an application process to obtain special
institutional investors do not automatically play a role in enhancing
permission to invest in domestically listed Chinese firms. This sets
corporate governance; whether they play such a role depends on the
China apart from other Asian markets such as South Korea and
institutional framework within which they make their investment.
Japan, where foreigners can invest more freely. The skewed power
balance resulting from the QFII system possibly places foreign minority
Our empirical findings have practical implications for Chinese listed
shareholders in a submissive role in corporate governance, with the
firms, foreign investors, and policymakers in China. We provide
result that they have little impact on the firm’s future dividends.
evidence that foreign institutional investors tend to prefer to invest in
firms that already pay higher dividends. This should be of interest to
firms that wish to raise funds from foreign providers of finance. Al else
So far research has focused primarily on the role of institutional
equal, firms can attract foreign institutional investment through the
investors in the U.S. and developed markets, with mixed results
signaling value of their dividend policy. In particular, for the majority of
(Grinstein & Michaely, 2005; Short et al., 2002). Although China's
Chinese listed firms that are ultimately controlled by the state, dividend
economy has been growing rapidly and many institutional investors
payouts may be used to signal that their privatization has been
have invested in Chinese listed firms, less attention has been paid to
successful. By the same token the results have implications for foreign
the role of institutional investors in China. Recently, Firth et al. (2016)
institutional investors. We show that foreign institutional investors
find that only one class of institutional investors mutual funds influence
investing in China assign a positive value to generous dividends;
firms to pay higher cash dividends. Our study complements Firth et al.
however, it is difficult for them to change firms’ future dividend
( 2016) by showing that the locations of institutional investors matter in
payments once they have made their investment choices in China.
explaining firms’ dividend policy, in addition to the types of institutional
Thus, it is important for foreign institutional investors to collect and
investors. Specifically, foreign institutional investors already investing
analyze firm-specific information concerning governance quality when
in Chinese listed firms under the quota scheme seem to have difficulty
carrying out stock valuation in China. Finally, this study provides
influencing Chinese listed firms to pay higher cash dividends by
implications for policy makers. If policymakers want sophisticated
changing their shareholding, probably because of their limited
foreign institutional investors to use their expertise to enhance the
shareholding and the high information asymmetry they face (Leuz,
corporate governance of Chinese listed firms, as they do in other
Lins, & Warnock, 2009). Instead, they are attracted to firms that pay
emerging markets (Baba, 2009; Desender et al., 2014; Huang & Zhu, high dividends to begin with.
2015; Jeon et al., 2011; Kim et al., 2010), they may consider relaxing lOMoARcPSD|45316467 826
L. Cao et al. / International Business Review 26 (2017) 816–827
the restrictions on foreign portfolio investment so that foreign (Continued)
institutions have more bargaining power in mitigating agency problems Variables Definitions in Chinese listed firms. Dividend
This study is subject to a number of limitations that open up payout
avenues for future research. First, the sample period of this study Dividend yield
Common dividends over market value of equity
starts from 2003, when China partially opened its domestic stock Foreign
A dummy variable equal to 1 if at least one of the largest 10
market to foreign institutional investors. Our time horizon is relatively shareholder
shareholders is foreign (including Hong Kong and Taiwan), and 0 otherwise
short, thus the findings may not represent the long-run behavior of the Foreign share
The proportion of shares held by the foreign shareholders
observed relationships. Second, although we controlled for the High foreign
A dummy equal to 1 if the foreign ownership by QFII of a given
potential endogeneity using the GMM method for a system of two
firm is higher than the sample median foreign ownership and
equations, our endogenous variables (i.e., Dividend; Foreign share) are 0 otherwise
censored, and coefficients based on GMM may be biased (Rigobon & Market to book
The ratio of the market value of equity to the book value of equity
Stoker, 2009). Moreover, in the analysis of the relationship between Firm size
The natural logarithm of total assets
changes in foreign share-holding and changes in dividends, we cannot Cash holding
Cash and cash equivalents divided by total assets
rule out the possibility that some of the lagged variables on the right- Leverage
Total liabilities divided by total assets
hand side are correlated with the disturbances, which may lead to ROE The after-tax return on equity
endogeneity bias. Third, this study focuses only on dividend policy and Intangible
Intangible assets divided by total assets Managerial
The proportion of managerial shares
foreign shareholdings. As foreign portfolio investment in China State-owned
A dummy variable equal to 1 if the firm is ultimately control ed
continues to grow in pace with the steady liberalization of the Chinese by the state
capital markets, future research should examine more Investment
Net property, plant and equipment over total assets, obtained
comprehensively the linkages between foreign ownership and the
from the Chinese CSMAR database. Index
Marketization Index widely used to measure the financial
performance, policies, and practices of Chinese listed firms. In
development of provinces in China based on five indicators:
particular, it would be interesting to examine whether the heterogeneity
the role of government, economic structure, free inter-
of firm-level corporate governance quality (e.g., as evidenced by board
regional trade, development of factor market, and legal
composition) influences the role of foreign institutional investors in
framework (Fan et al., 2011; Wang et al., 2016).
Chinese listed firms. Moreover, future research could explore the
impact of foreign institutional investment on other governance issues
such as tunneling by controlling shareholders, earnings quality, and
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