Cash Dividend Behaviors around Private Placements in China: Interactions between Two Information-Releasing Events

Abstract

We investigate the information role and the information interaction of cash dividends around equity private placements for China’s publicly listed firms from 2004 to 2019. Our results show that firms are more likely to allocate higher cash dividends when private placements are nearer, possibly to build a favorable information environment for subsequent equity refinancing. Using a propensity score matching (PSM) approach, the results show that firms usually do not increase cash dividends for the compensation of illiquidity in the lockup period following private placement. The persistently low cash dividends after the lockup period rule out the suspicion of tunneling (via excessive payouts) resulted by private placements. In the meantime, we find that private placements positively affect firm performance. This could be why managers find conveying information via dividends redundant. We also find that announcement returns for cash dividends paid by firms with private placements are higher compared to their peers.

KEYWORDS:

• Cash dividend;
• private placement;
• signaling;
• information certification

JEL classification:

• G32
• G35

Disclosure statement

There are no relevant financial or nonfinancial competing interests to report.

Data availability statement

Data subject to third party restrictions. The data that supports the findings of this study are available from the China Stock Market & Accounting Research (CSMAR) database. Restrictions apply to the availability of these data, which were used under license for this study.

Notes

1 The actual investigation period for this study spans from 2004 to 2019 which includes a two-year pre-private placement period and a four-year post-private placement period for testing purpose.

2 This regulation (2018 version) is available on the official English website of the CSRC. View this regulation at http://www.csrc.gov.cn/pub/csrc_en/laws/rfdm/DepartmentRules/201804/P020180427401543857135.pdf.

3 *ST is short for special treatment and is normally issued to firms that report financial loss and face the risk of becoming delisted. PT stands for particular transfer. PT shares are not included in the market index. These two categories of shares are subject to different trading rules compared to the ordinary outstanding shares and therefore are excluded from the examined sample.

4 For firms that have conducted multiple private placements from 2006 to 2015, their first private placements are viewed as the treatment event.

5 A firm’s earning ability is measured by earnings before interest and taxes scaled by the total assets at the end of the year.

6 The risk-free rate uses the yearly interest rate of term deposits (declared by the People’s Bank of China) converted to a daily rate.

7 The market risk premium is calculated as daily market return considering the reinvestment of cash dividends minus the daily risk-free rate.

8 Dong et al. (2020) also uses the intercept α as a measure of risk-adjusted abnormal performance of their private placement firms but they rely on monthly returns to estimate α.

9 Even though it is typical to use analyst forecasts to estimate earnings and dividends for markets where the Institutional Brokers Estimate System (I/B/E/S) provides enough coverage, very few A-share firms in China are covered by the I/B/E/S. Therefore, we use industry-average as a measure of expected earnings and dividends.

10 Because investors who can trade around announcements of cash dividends are those who are not subject to resale restrictions, this test does not control for the presence of lockup periods.

11 Examining the long-run performance of IPOs in China, Chi et al. (2010) find that the average cumulative abnormal returns and buy-and-hold abnormal returns during a three-year period following IPOs are significantly positive.

12 Cheung et al. (2006) find that negative excess returns are earned by firms conducting tunneling-related connected-party transactions even after 12 months have passed.

13 Repeated robustness tests are also performed on financially healthy PPC firms and their matching non-PPC firms, and the results are highly consistent with those reported given by the whole sample. This verifies that the information certification effect of private placements is more at present when financial difficulty is not in the way. Also, the information certification effect confirmed by the full sample is mainly contributed by firms in relatively sound financial conditions. This part of the results is not reported for brevity.