Dividend Policy, Corporate Governance and Stock Liquidity

This paper examines the effect of corporate governance and stock liquidity on corporate payout policy in the context of the split-share structure reform initiated in 2005 in China. In this reform, non-tradable shares were converted into tradable shares compulsorily. The reform removed a liquidity constraint; meanwhile it facilitated a better alignment of the interests of the controlling shareholders with those of the outside investors. These lead to significant improvements in firms’ liquidity and governance. We find that on average, cash dividends decrease significantly after the reform. The reduction in payouts is more pronounced for firms with higher growth rates and liquidity. In terms of cash dividends, a larger decline in the post-reform periods is observed in firms that are controlled by state shareholders.