In Times of Crisis Does Ownership Matter? Liquidity Extraction Through Dividends During the 2007–2009 Financial Crisis

Liquidity flow between regions with different levels of temporary financial constraints has received insufficient attention. This study takes advantage of a natural opportunity: Chinese capital markets clearly distinguish between foreign direct investment firms and firms with foreign institutional investment. Using the distinctive categorization of institutional holding structures in China, we find that foreign controlled enterprises were associated with an extraordinary increase in dividend payouts during the Global Financial Crisis, with concomitant underinvestment. Our results suggest that foreign-controlling shareholders extracted liquidity through dividends, highlighting a previously ignored channel for global transference of liquidity, with concomitant agency costs