Information content of dividends: a case of an emerging financial market
Abstract
Purpose
The purpose of this paper is to examine the signaling and free cash flow hypotheses of dividends in the context of an emerging financial market.
Design/methodology/approach
The authors use fundamental financial information of Chinese companies listed in the Shenzhen and Shanghai stock exchanges. They examine the impact of cash dividend payments on future profitability of individual firms with and without controlling for non-linearity in their earnings to test the signaling hypothesis. They also determine the characteristics of dividend paying firms to examine the free cash flow hypothesis.
Findings
It was found that while dividend increases by publicly listed Chinese firms are followed by increases in earnings in two subsequent years, such relationship does not exist in the case of dividend decreases. However, under the assumption of non-linearity of earnings, it was found that neither dividend increases nor dividend decreases convey any valuable information about future changes in earnings of Chinese firms. Further, it was found that firms with high cash holdings, large profitability and high managerial efficiency are likely to pay dividends. The authors therefore conclude that announcements of cash dividend payments do not signal future performance but indicate good governance practices of publicly traded firms in China.
Originality/value
This evidence is critical for potential foreign investors in their portfolio investment decisions and for regulators in determining an efficient measure of corporate disclosure in China.
Keywords
Acknowledgements
The authors thank the editorial team and anonymous referees of the journal, and participants at the Northern Finance Association Conference 2010, Southwestern Finance Association 50th Annual Meeting and Eastern Finance Association 2011 Annual Meeting for their valuable comments on earlier versions of this paper.
Citation
H. Chowdhury, R., Maung, M. and Zhang, J. (2014), "Information content of dividends: a case of an emerging financial market", Studies in Economics and Finance, Vol. 31 No. 3, pp. 272-290. https://doi.org/10.1108/SEF-04-2013-0046
Publisher
:Emerald Group Publishing Limited
Copyright © 2014, Emerald Group Publishing Limited