Enhanced disclosure environment and stock dividend/split in China

ABSTRACT

This paper examines changes in firm behaviour around a regulatory change regarding stock dividend/split in China which mandates enhanced disclosure of such activities. Firms announce significantly fewer stock dividends/splits in the enhanced disclosure environment. The enhanced disclosure also improves the link of stock dividend/split activities with firm growth. Investors react less positively to stock dividend/split announcements in the enhanced disclosure environment. The findings suggest that more cautious announcement strategies and more rational investor reactions are consistent with a decline in false signalling.

KEYWORDS:

• Enhanced disclosure environment
• stock dividend
• stock split
• China

JEL CLASSIFICATION:

• G14
• G38

Highlights

1. Firms announce significantly fewer stock dividends/splits in the enhanced disclosure environment in China.

2. The enhanced disclosure improves the link of stock dividend/split activities with firm growth.

3. Investors react less positively to stock dividend/split announcements in the enhanced disclosure environment.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Based on our observations, between 2014 and 2017 around 70% of the Chinese listed firms issued cash dividends with the average level of 38.6% of their net incomes; and around 18% of firms issued stock dividends with the average level of 258.3% of their net incomes. The much greater level of stock dividend renders it much desirable in the market.

² ‘Stock dividend’ shifts the value of the issued stock from the retained earnings account to the capital stock account, and ‘stock split’ shifts the value of the issued stock from the additional paid-in capital account to the capital stock account.

³ Positive stock reactions and excess returns have been observed in both western markets (Grinblatt, Masulis, and Titman 1984; Ikenberry and Ramnath 2002) and the Chinese market (Anderson et al. 2011).

⁴ A few other studies use the ‘liquidity theory’ to interpret the feedback and argue that the increase of outstanding shares and stock liquidity can attract potential investors (Lakonishok and Lev 1987; Brennan and Copeland 1988).

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [Grant number: 71602010] and the National Natural Science Foundation of China [Grant number: 71602085].