Non-Dividend Payout Behavior of Companies: Research on the Effect of Large Shareholders’ “Voting with Their Feet”

ABSTRACT

This study explores the effectiveness of large shareholders’ “voting with their feet,” in motivating a listed company to alter its non-dividend payout behavior. We show that the split-share structure reform, which changed the company’s shares held by controlling shareholders and other large shareholders from nontradable shares to tradable shares, gave large shareholders the ability to exit and therefore could inhibit this behavior. Furthermore, when a company has a higher ownership concentration of controlling shareholders and a lower quality of external auditing, the inhibitory effect is more significant. This paper considers China representative of emerging markets and suggests another way to manage the non-dividend payout behavior of listed companies in emerging markets.

KEY WORDS:

• “voting with their feet”
• controlling shareholders
• dividend payout
• governance mechanism
• large shareholders

JEL CLASSIFICATION:

• G34
• G35

Notes

1. A “mandatory dividend policy” is a requirement by the CSRC to raise the cash dividend ratio of listed companies unconditionally. A “non-mandatory dividend policy” refers to a decision on dividend payment by companies determined solely by the market, with no government intervention. A “semi-mandatory dividend policy” is a policy between a “mandatory dividend policy” and a “non-mandatory dividend policy,” which links the company’s cash dividend level to future qualifications for refinancing. If a company pays a real dividend level that does not meet the standard required in regulatory policy, it will lose its qualifications for future financing. Because of this conditionality, it is not fully mandatory, so it is here called “semi-mandatory.” Tao, Nan, and Li (2016) offer further explanation of the semi-mandatory dividend policy.

2. A-shares, or RMB common shares, are issued by Chinese domestic companies for domestic institutions, organizations, or individuals to subscribe and trade in RMB.

3. According to the items recorded in the annual report, the stockholders’ equity status in listed companies in different years is laid out one by one. The final controlling shareholder’s holding ratio is actually the proportion of the largest shareholder holding shares of the person acting in concert, and the large shareholder’s holding ratio is actually the proportion of the second-largest shareholder holding shares of the person acting in concert.

4. ST means special treatment of stock trading in listed companies with unusual financial or other conditions. *ST refers to companies that have been warned about delisting risks on account of operating at a loss for three consecutive years. PT is an abbreviation for particular transfer, and particular transfer services are implemented for those suspended shares.

5. Big Four refers to the four largest accounting firms: PriceWaterhouseCoopers (PwC), Deloitte Touche Tohmatsu (DTT), Klynveld Peat Marwick Goerdeler (KPMG), and Ernst & Young (EY).

6. Denis and Osobov (2008) point out that the higher the ratio of corporate retained earnings is to owner equity, the more likely it is to be a mature enterprise, thus growth ability is lower. When the internal and external governance mechanism is relatively weak, it is difficult for “voting with their hands” to play a role. We can only hope that “voting with their feet” will safeguard the interests of large shareholders. According to our research results, at this time, large shareholders’ “voting with their feet” can present a greater threat to controlling shareholders. However, when the liquidity of shares is hindered, it is difficult for large shareholders to exit, and the exit threat effect will be greatly reduced. Therefore, the interests of large shareholders may be greatly infringed upon by controlling shareholders.

7. When the internal and external governance mechanism is relatively weak, it is difficult for “voting with their hands” to play a role. We can only hope that “voting with their feet” will safeguard the interests of large shareholders. According to our research results, at this time, large shareholders’ “voting with their feet” can present a greater threat to controlling shareholders. However, when the liquidity of shares is hindered, it is difficult for large shareholders to exit, and the exit threat effect will be greatly reduced. Therefore, the interests of large shareholders may be greatly infringed upon by controlling shareholders.

Additional information

Funding

This work was supported by the National Natural Science Foundation of China under Grant [No. 71702070].