Dividend Policy and Corresponding Stock Market Reaction in China

Meiling Liu

Wuxi Institute of Commerce, Wuxi, Jiangsu, 214153, China

Keywords: Dividend policy, stock market reaction, information disclosure.

Abstract: With the development of socialist market economy and economic globalization, the growth of stock market

in China has been tested in many aspects. Enterprises, shareholders and relevant regulators need to have

joint efforts in facilitating the harmony and prosperity of Chinese stock market, especially in dividend

policy and information disclosure. The warming trend of Chinese stock market will have a retroaction on

dividend policy. Given the policy adjustments of some enterprises and more accurate information

disclosure, stock market in China still has a large development potential.

1 INTRODUCTION

Stock market in China started in 1989. Although the

early development of Chinese stock market was not

smooth, it has come to act on international

convention and develop comprehensively after

China became a member of WTO and had its market

extended to the whole world. In regard to the fast

changing stock market, some experts raised several

kinds of bold predictions and thorough analysis on

the economic growth rate, the amplification of

inflation rate, reform of IPO and law enforcement

efforts. In order to gain a positive position in stock

market competition, enterprises need strong

management and reasonable dividend policy to earn

the trust and support from shareholders. The

sustainable development of Chinese stock market

also needs the exploration of China Banking

Regulatory Commission (CBRC) and China

Securities Regulatory Commission (CSRC) with the

assistance of perfect and scientific policies to

guarantee the benefits of concerned parties and the

coordinated development of economy (Qian Lili and

Sun Yujun, 2014).

2 CURRENT SITUATION OF

DIVIDEND POLICY IN CHINA

Dividend policy is a standard of dividend

appropriation proposed by general meeting of

stockholders or board of directors. It often contains

the ways and time of dividend appropriation and

influences enterprises’ distribution and plan of

profits. Therefore, Chinese enterprises are cautious

of dividend policy and different enterprise has its

own characteristic of dividend policy.

2.1 No or rare dividend appropriation

in many enterprises

As investors of companies, shareholders have the

rights to proportional distribution of dividend, which

is explicitly stipulated in Company Law of the PRC.

According to legal procedure, when a company has

allocable profits, general meeting of stockholders or

board of directors should first draft profit

distribution plans for general meeting of

stockholders to discuss (Wang Chen, 2014). If these

plans are passed, the company should make a

dividend according to the plans. Dividend

appropriation ought to be the operating principle for

companies to observe, and it can also attract the trust

and further investment of shareholders.

Facts show that dividend appropriation can help

the stock price rise of enterprises in some industries.

For example, China Mobile Communication Corp

(CMCC) and China Unicom began dividend

appropriation in March, 2003. Then, the stock price

of the two companies stopped falling tendency and

began to rise. CMCC had great rise of its stock price

for its good market performance and stood out over

the same period of stock. Thus it can be seen that

dividend appropriation is good for the development

of enterprises in the stock market. However, current

125

Liu M.

Dividend Policy and Corresponding Stock Market Reaction in China.

DOI: 10.5220/0006445201250128

In ISME 2016 - Information Science and Management Engineering IV (ISME 2016), pages 125-128

ISBN: 978-989-758-208-0

125

dividend policy in China can hardly reach the

situation of healthy and steady dividend

appropriation, which needs people to conduct further

study. Before the year of 2002, dividend

appropriation was not common in all kinds of

companies. About 220 listed companies never had

dividend appropriation, and some of them even

never had any form of profit appropriation (Zhang

Junmin, Wu Fengmin, Fu Shaozheng, 2014). The

shortage of knowledge about .listing standard and

imperfect mechanisms can explain the situation in

early stock market of China. As China became a

member of WTO, it began to positively participate

in global market competition. The stock market,

where most competition exists, requires more

normative and reasonable dividend policy. Although

the number of listed companies that never had

dividend appropriation is declining, the phenomenon

of rare appropriation still exists, partly because of

the low rate of return and profitability of Chinese

companies.

2.2 Partial adoption of residual

dividend policy

The history of stock market in China is short and

China has been learning from the stock markets in

developed countries. As far as China listed

companies are concerned, their quality assessment

was stipulated by China Banking Regulatory

Commission in 2005. The main idea of this

assessment is that the quality of companies should

be established on the foundation of maximizing

shareholder interests, including management ability,

profitability, financial liquidity and information

disclosure. Therefore, the dividend policy is affected

by the operating conditions of companies to some

extent.

The residual dividend policy has been applied by

some Chinese listed companies. However, this

application is periodic, long-term adherence to this

policy will restrict the interests of companies and

their develop capabilities. The residual dividend

policy is generally applied to those companies with

many investment opportunities and higher rate of

investment return, so these companies can distribute

residual profits after the internal capital transfer.

This model can not only guarantee the steady

operation of companies, but also help some initial

listed companies or even newly established

companies to form reasonable capital structure,

ensuring their steady development at early stage.

Some Chinese listed companies have small scale of

capitals, so the residual dividend policy can help

them relieve the capital pressure of reinvestment.

However, short-term of application can support the

growth of young companies while the long-term

application can only bring the disjunction between

stock prices of companies and their business

circumstances to be more obvious. The detrimental

factor of dividend is not stock price, and the weak

dividend awareness can make shareholders

suspicious of the business circumstances of

companies. Seriously, some shareholders may even

withdraw shares from their companies. A series of

malignant consequences can have bad influence on

the debt paying ability and investment ability of

enterprises. If the managers who adopt this model

can only seek to ear a lot of profits but not to

allocate them, the company will finally be isolated.

2.3 Disturbance from untrue

information

The dividend policy of rare or no dividend

demonstrated by some listed companies in China

comes down to nonstandard operation and even

illegal behaviors of managers. The imperfect of

regulations and systems of stock market allow some

companies to infringe the legal rights of many

shareholders and they even are kept in the dark

Firstly, in the process of making profits, the

accounting and supervision of companies often have

some exaggerations. Although both the government

and enterprises are calling on information disclosure

and fair competition, in fact, nonstandard calculation

of assets debts and cash flow, the information got by

the government, CBRC, enterprises and shareholders

has been contaminated at source. The profits

distribution based on false information has already

deviated from honest goals. Therefore, the dividend

policy has no longer been profitable for

shareholders. The misappropriating of some listed

companies ignored Company Law and Accounting

Law as well as some industry norms, increasing the

suspicion of reaping huge profits with other

institutions and endangering the Chinese dividend

policy and stock market. In order to solve these

problems, the Accounting Department of Jinhua,

Zhejiang once tried Centralized Office to have the

financial work conducted in one place where

auditing departments can timely supervise and check

the financial work to ensure the normalization of

accounting information and the truth of accounting

report offered by companies. Some similar

controlling methods are constantly being proposed

to deal with the untrue information disclosure and

non-valid transactions among enterprises,

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guaranteeing the steady of stock market and the

legal interests of shareholders.

3 ANALYSIS ON THE REACTION

OF STOCK MARKET IN CHINA

After the long-term depression, stock market in

China gradually shows signs of a turnaround. The

good news of central government policy, the overall

prosperity of economy and relaxed market

environment give hope to many enterprises and their

managers. Many reforms will continuously emerge

in stock market. For the comprehensively economic

development, China had steady economic

development with controlled indexes in reasonable

scope, laying a good foundation to further economic

development and policy reforms. Huatai-Pinebridge

Fund points out that the optimistic situation will

continue and there will be obvious increase in

manufacturing industry, architecture industry and

consumption industry, which is a good news and

chance for stock market. However, for listed

companies, whether their interests can be guaranteed

or not depends on the appearance of relevant

dividend policy. Judging from the trend of recent

years, the number of companies with no or rare

dividend appropriation will be smaller and smaller.

The national policy and regulations of CBRS also

don’t allow the existence of unreasonable form of

dividend appropriation. The prosperity demonstrated

by stock market will act on the dividend

appropriation policy and standard of some listed

companies in a certain period. Some companies will

seek to strengthen the structural allocation and have

their dividend appropriation on the basis of fairness

and justice. The number of dividend should be

defined by clear evidence and the time of dividend

appropriation should be decided by the general

meeting of shareholders. In addition, some

companies draw up corresponding plans for the

confirmation of business operation, capital transfer

as well as the benefits protection of both the

companies and their shareholders, scientifically

avoiding risks to the large extent.

3.1 Further protection of shareholders’

interests

The protection of shareholders’ interests has long

been emphasized by national policy. The current

prosperity of Chinese stock market should be

attributed to the support of shareholders whose

capitals enable enterprises to continuously enhance

their flow of fund and expand their business scales.

The cooperation between enterprises and their

shareholders is becoming closer and closer, making

stock market in China gradually become mature over

the decades of development. Protecting the legal

interests of shareholders is not only the guarantee of

cooperation, but also the key link of maintaining the

order and steady of stock market. With the

increasing supervision and management on the

behaviors of enterprises, the functions of

shareholders are becoming more regulatory and

reasonable. One share one vote rule and the principle

of fairness, justice and open have been deepened,

guaranteeing the rights and dividend appropriation

of shareholders from the whole company.

Meanwhile, the enactment of policies on the

protection of shareholders’ interests legalized the

behaviors of different parties, motivating the

dynamic of the whole stock market.

The status of shareholders changed with the

adjustment of enterprises’ policies. Shareholders

have come on the stage rather than stay behind the

stage, and their rights of information and inquiry

have been strengthened further. At the stage of

dividend appropriation, companies should take

priority of shareholders’ interests and they can not

have internal absorption of dividend with

unreasonable reasons. The supervision department

has set up reporting institutions to supervise the

illegal behaviors of some listed companies. Then,

the operation of stock market should more rely on

the shareholders’ interests and listed companies

ought to strictly regulate their business and profits

allocation, facilitating the harmonious development

of stock market.

3.2 Larger scale of information

disclosure

The information disclosure of enterprises has long

been the focal issue because the data and materials

of the enterprises’ business and their reality not only

concern the image and fortune of an enterprise, but

also arouse the supervision of the whole stock

market and economy. With the increasing expansion

of business scales of some enterprises, the successful

conduction of enterprises’ activities can be the result

of the cooperation among several enterprises and

government departments. Therefore, once the

information collection is inaccurate, the whole

business chain would be endangered and the

investigation of enterprises or officials would arouse

an uproar among the public. In order to guarantee

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the legality of internal operation of enterprises and

make information or procedures demonstrated

before shareholders more persuasive, expanding

information disclosure is the focal work of current

stock market and economic field in China.

The problems of information disclosure in China

can be summarized as untruth of information,

nonstandard form of information disclosure and out

of date information disclosure. The resolution of

these problems should find reasons from enterprises

and relevant departments. Firstly, the supervision

development should enact uniform regulations for

the information management of enterprises and

establish complete information process to replace

the nonstandard operation of some enterprises. In

addition, enterprises should strengthen internal

control and set up prestigious supervision and audit

panels to have necessary supervision over the daily

work of enterprises. Special emphasis is supposed to

be given to accounting behaviors to prevent the

alteration and omission of information at source.

The information management of enterprises is their

vital fortune, and good information disclosure can

earn the recognition of more shareholders and other

enterprises, helping to create good atmosphere in the

whole stock market.

4 CONCLUSIONS

Stock market in China has undergone tests from

different aspects over the past decades. In the

unsmooth practices, some immature behaviours have

been demonstrated by some listed companies in

stock market. Compared with other countries, the

dividend policy of China is not perfect and has not

formed a set of code of conduct. No or rare dividend

appropriation, unreasonable dividend policy and

poor information disclosure greatly hindered the

development of stock market in China, damaging the

legal rights and benefits of shareholders and

enterprises. Nowadays, enterprises and supervision

departments are trying to take measures to bring the

stock market to high-efficiency development track.

On that basis, dividend policy and stock market

quality can be optimized and upgraded.

REFERENCES

Qian Lili, Sun Yujun. Analysis on Dividend Distribution

of Ningbo Listed Companies. Commercial

Accounting. 2014(9):76-77.

Wang Chen. Correlation of Listed Companies' Capital

Structure and Cash Dividend Policy, Heilongjiang

Science and Technology Information. 2014(7):295-

295.

Zhang Junmin, Wu Fengmin, Fu Shaozheng. Financial

crisis, Ownership Concentration and Cash Dividend

Policy - Based on Empirical Evidence from A-share

Listed Companies. Journal of Nanjing Audit

University. 2014(3): 39-48.

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