Abstract
To find the impact of multiple large shareholders on dividend payments, this chapter examines the association between cash dividends and the shareholders balancing mechanism (SBM) using the exogeneity and endogeneity assumptions of corporate ownership structure. This chapter identifies, in the case of China, whether paying cash dividends is a means of protection or the expropriation of minority shareholders’ interests. With 4,810 observations from companies listed on the Shanghai Stock Exchange over the period 2004–2008, the authors find significant negative associations between cash dividend payments and the SBM of non-controlling large shareholders under the exogeneity assumption, and the SBM of tradable shareholders under the endogeneity assumption. The findings suggest that cash dividends are used as a manner of tunneling by the controlling shareholder. This chapter also shows that the SBM of non-controlling shareholders has a significant positive effect on cash dividends, especially for companies paying high and abnormal dividends. The results imply that in China’s capital market, cash dividend payments are not only expropriations of minority shareholders’ interests by the controlling shareholder, but also by the coalition of controlling and non-controlling large shareholders. The findings confirm the tunneling and joint expropriation incentive of corporate dividend policy, and suggest that the presence of multiple large shareholders doesn’t always alleviate firm's agency costs and protect the benefits of minority shareholders.
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Notes
- 1.
The controlling shareholder is defined as the firm’s first largest shareholder, and non-controlling large shareholders are the joint largest excluding the controlling shareholder. For example, the non-controlling large shareholders might be the second to fifth-largest shareholders of a company.
- 2.
The SBM of non-controlling large shareholders can strengthen the protection for the interests of minority shareholders by inhibiting the expropriation of controlling shareholders (Attig et al. 2008; Maury and Pajuste 2005). Though the SBM’s constraint effects of tradable shareholders are limited, the change of the SBM can show the movement of the holdings of tradable shareholders and reveal tradable shareholders’ attitudes towards a firm’s dividend policy.
- 3.
In China’s capital market, the tax rate on capital gains is zero; thus, tradable shareholders are willing to adopt the way of voting by foot to avoid a firm’s adverse policies.
- 4.
We define high-dividend companies as those with a level of dividends higher than the median value of dividend payments ratio in companies with positive EPS and dividend payments in an industry over a particular year, and abnormal-dividend companies are defined as those who still pay dividends even though there is net loss in the year.
- 5.
For example, the day of dividend plan announcement (DDPA) for company Shandong Aluminum (ID: 600205) is 31st January 2004, so t−1 is 2003.Q4, and t is 2004.Q1; the DDPA for company Suzhou Hi-tech (ID: 600736) is 14st April 2005, so t−1 is 2005.Q1, and t is 2005.Q2; for company Shengyi Technology (ID: 63), the DDPA is 25st July 2006, so t−1 is 2006.Q2, and t is 2006.Q3; the DDPA for company Chutian Speed (ID: 600035) is 18st December 2006, so t−1 is 2006.Q3, and t is 2006.Q4.
- 6.
The research on the exogeneity of a firm’s ownership structure can be traced back to the early studies on corporate governance by Jensen and Meckling (1976), who believe firm performance can be affected by its ownership structure, and propose an exogenous feature of a firm’s ownership structure. A number of studies in the literature support the exogeneity of ownership structure. For example, Morck et al. (1988) believe that ownership structure has no linear effect on firm performance. Based on the exogeneity of ownership structure and using the piecewise linear ordinary least square regression, Morck et al. (1988) found that different levels of ownership structure have diverse influences on firm performance, as measured by Tobin’Q. Thus, Morck et al. (1988) suggest the, “convergence of interests,” and “entrenchment effects” hypothesis. McConnell and Servaes (1990) show that there is no linear relation between firm performance and corporate ownership structure with an inflection point between 40 and 50%, and conclude that ownership structure is an exogenous but not endogenous variable by which firm performance is affected.
- 7.
The exogeneity assumption of ownership structure is challenged by the endogeneity hypothesis of ownership structure (e.g., Demsetz 1983; Demsetz and Lehn 1985; Cho 1998; Himmelberg et al. 1999; Demsetz and Villalonga 2001; Harvey et al. 2004; Cheung and Wei 2006). The endogeneity of ownership structure argues that a firm’s ownership structure arises endogenously and that it has no systematic effects on firm performance (Demsetz 1983). Demsetz and Lehn (1985) provide empirical evidence of the endogeneity of firm’s ownership structure, revealing no significant relationships between firm performance and ownership structure. Himmelberg et al. (1999) find that there is a quadratic relationship between firm performance and ownership structure after the endogeneity is controlled, while Demsetz and Villalonga (2001) show corporate ownership structure has a significant negative effect on firm performance for ordinary least square estimation, but no statistically significant relation between these two variables by the two stage least square (2sls) estimation when the endogeneity is controlled.
- 8.
There is no multicollinearity in Model 2. The mean value of VIF without year and industry variables in Model 2 is 1.32, with the maximum at 1.72, and the minimum at 1.03. The VIF for year and industry variables maximizes at 8.87 and minimizes at 1.82.
- 9.
There is also no multicollinearity in Model 4. The mean value of VIF without year and industry variables in Model 4 is 1.65, with the maximum at 2.57, and the minimum at 1.07. The VIF for year and industry variables maximizes at 8.88 and minimizes at 1.79.
- 10.
The mean values of ΔSBM_eno t in companies with (without) cash dividends are 0.081(0.251) and 0.372(0.400) before and after the non-tradable share reform. The disparity of ΔSBM_eno t before and after the reform is the largest in companies with high and abnormal dividends. For companies with high (abnormal) dividends, the mean values of ΔSBM_eno t are 0.084(−0.051) and 0.399 (0.490), before and after the non-tradable share reform, respectively.
- 11.
If there is no stock trade on the day when the dividend plan was announced, such as the DDPA fell on holidays or weekends, the data of the first trading day before DDPA is adopted. We also use some alternative methods, such as the removal of the observations when there is no stock trade on the DDPA, and the replacement with the first trading day after the DDPA, and these do not change the robustness of our research.
- 12.
In companies with a different SBM of non-controlling large shareholders, the difference of negative effects exists in regressions with 1,233 and 987 observations, whilst in companies with a different SBM of tradable shareholders, the difference of negative effects only exists in regressions with 987 observations.
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Lv, H., Li, W. (2013). Multiple Large Shareholders and Joint Expropriation with Dividend Payments. In: Cressy, R., Cumming, D., Mallin, C. (eds) Entrepreneurship, Finance, Governance and Ethics. Advances in Business Ethics Research, vol 3. Springer, Dordrecht. https://doi.org/10.1007/978-94-007-3867-6_18
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