Corporate Dividend Payout and Earnings Management : Evidence from Chinese Regulatory Changes

This paper examines the market reaction to and earnings management choices around changes in the regulations requiring a higher minimum dividend payout in China. We exploit the unique Chinese setting that facilitates identification of the agency cost effect to shed new light on the determinants of dividend payout policy. First, we find that the market reaction is more positive for firms that paid less than the new required minimum payout than for those that paid more than the new required minimum. In addition, we show that low dividend payers exhibit a greater tendency to manage their earnings downwards to comply with the earnings-based threshold, and investors can “see through” such earnings management behaviors. Our findings support the view of DeAngelo, DeAngelo and Skinner (2009) that agency costs of free cash flow retention are an important part of the dividend payout story