The value relevance and information content of cash and stock dividends in China

Abstract

Due to their unique institutional features, the Chinese stock markets provide an interesting experimental setting in which to examine how cash and stock dividends convey value-relevant information about future performance and future cash dividends. Applying market valuation equations and prediction models to a large sample of Chinese firms from 2003 to 2011 produces several interesting results. When cash dividends are not paid, then stock dividends are positively associated with firm value, and convey information about future cash dividends and future earnings. When cash dividends are paid, however, it is these that convey information about future cash dividends. Following the share tradability reform and convergence with International Financial Reporting Standards, the value relevance and information content of cash dividends are predicted and found to be stronger, while the value relevance of stock dividends weakens over the same time period. Our evidence suggests that, in a weak information environment, where management have limited control over cash dividend distributions, stock dividends play an important role as information conduits.