The economic effects of the comply-or-explain dividend payout policy: evidence from a quasi-natural experiment

Abstract

This study examines the effects of the world’s first comply-or-explain regulation in China, while examining the issue of endogeneity. We rely on a quasi-natural experiment in Chinese stock markets and employ a difference-in-differences approach to investigate changes in executive compensation, institutional investor holdings, and earnings quality and management. We find that, after the adoption of the comply-or-explain policy, the overall dividend payout increases. However, this regulation does not seem to exert any significant influence on either executive compensation or institutional ownership. Finally, we offer evidence that this regulation leads to an improvement in overall investment efficiency, which is likely to originate from the reduction of overinvestment (in the long term) rather than underinvestment.