Ownership Structure, Control Chains, and Cash Dividend Policy: Evidence from China

William Bradford University of Washington, Seattle Chao Chen* California State University, Northridge Song Zhu Tsinghua University, Beijing Abstract: Chinas corporate sector is unique in many aspects. For example, most listed firms in the Shanghai and Shenzhen stock exchanges are carve-outs of stateowned enterprises in China, stock ownership is highly concentrated, and government bodies own a majority or controlling ownership of many publicly listed companies. Furthermore, a high percentage of the stocks of listed firms is not fully circulated in the Chinese stock market, but held by state-owned enterprises as non-tradable shares. This paper investigates the cash dividend policy of listed companies in China from the perspective of ownership structures and control chains that have evolved in Chinas unique institutional and legal setting. The level of cash dividends per share is higher for companies ultimately controlled by non-state entities than for those controlled by the state, in particular, local government controlled firms. Local government controlled firms are more likely to pay less cash dividends because they have a greater incentive than central government controlled firms to support its listed companies. For companies ultimately controlled by the state, the longer the control chain, the higher the probability of cash dividends, the higher cash dividends per share and higher payout ratio. The opposite holds for firms that are not controlled by the state. The cash flow right is positively related to the probability of a cash dividend distribution, the level of the cash dividends, and the cash dividend payout ratio. The greater the divergence of the control rights and the cash flow rights, the higher the incentive for those with dominant control rights to seek rents from shareholders with minority control rights; in China the greater divergence leads to firms paying more dividends. Keywords: Ownership structure, Control chain, Cash dividends, Ultimate shareholder, Tunneling, Internal capital market, Rent seeking JEL Classification: G32, G35, G38 * Corresponding author. Center for China Finance and Business Research, California State University, Northridge, CA 91330-8379, U.S.A., E-Mail address: chao.chen@csun.edu, Tel: 818-677-4622, Fax: 818-677-6079.

Ownership Structures, Control Chains, and Cash Dividend Policy: Evidence from China

1. Introduction The governance and ownership structure in Chinas corporate sector differ broadly from those in the U.S. and Europe (Lv and Wang, 1999; Yuan, 2001; Lee and Xiao, 2003; Lv and Zhou, 2005). How do the differences affect dividend policy among listed companies in China? Previous papers conclude that the existing theories of dividend policy do not have much explanatory power for the dividend decisions of firms in China (Lv and Wang, 1999; Lee and Xiao, 2003). This paper focuses on firms in China, and seeks to answer the following questions: What are the incentives for listed companies in China to distribute cash dividends? What determines the

probability of a cash dividend distribution, the level of cash dividends, and the payout ratio of firms in China? Chinas corporate sector is evolving from a unique institutional background. For example, most listed firms in the Shanghai and Shenzhen stock exchanges are carveouts of state-owned enterprises in China, stock ownership is highly concentrated, and government bodies hold a majority or controlling ownership in many publicly listed companies. Furthermore, a large fraction of the stocks of listed firms are not fully circulated in the Chinese stock market, but held by state-owned enterprises as nontradable shares. Investors and the market are unable to force the management, which is usually appointed by the controlling shareholder, to make decisions in the best interest of all shareholders. Previous research on Chinese securities market document that the largest shareholder can influence the dividend decision of a listed company to benefit his or her own interest (e.g., Yuan, 2001; Lee and Xiao, 2003; Lv and Zhou, 2005). The China Securities and Regulatory Commission (CSRC) requires listed firms to disclose

the identity of those who ultimately control the firm. Usually, the decision-making rights of listed firms in China are in the hands of the controlling shareholders or ultimate shareholders, rather than the management. We propose three hypotheses about the cash dividend policy of listed companies in China: 1) the cash demand of shareholders hypothesis; 2) the internal capital market hypothesis; and 3) the rent seeking hypothesis. The cash demand of shareholders hypothesis reflects that the capital supply channels for companies controlled by non-state entities are inferior to those controlled by the state (Xia and Fang, 2005; Brandt and Li, 2003). Ultimate shareholders of nonstate entities are more uncertain about the future regulatory changes than are ultimate shareholders of state-controlled entities. That is, state-owned entities have more impact on state regulatory changes than do non-state entities. This is particularly important in China, which changes its securities laws through internal government deliberations more than the public/legislative processes in the U.S. Shareholders of non-state firms experience greater uncertainty, which translates into higher equity opportunity costs and demand for cash nowdividends. This is magnified by statecontrolled firms obtaining debt capital more easily and at a lower cost than non-state controlled firms. For these reasons, the cost of capital for non-state controlled companies is higher than that of state controlled companies. Because of the cost of funds held for investment, non-state controlled firms incur more surplus funds and pressure to pay cash dividends. We find that the probability of cash dividend distributions, the level of cash dividends per share, and the cash dividend payout ratio are higher for listed companies ultimately controlled by non-state entities than for those controlled by the state. This finding is consistent with the cash demand of shareholder hypothesis. The internal capital market hypothesis suggests that the more powerful the internal stock market functions, the stronger the ability and probability for controlling shareholders and ultimate shareholders to use cash (Almeida and Wolfenzon, 2004; Fan et al., 2005). Ultimate shareholders and controlling shareholders do not have

more of a finance channel using direct control rather than multi-layer control. Therefore, they request listed companies to distribute more cash dividends to satisfy their cash demand. Where the state has ultimate control, the longer the control chain, the more severe is the agency problem. Fan and Wong (2005) suggest that a longer control chain means an increase in the markets influence and less government intervention. This leads to increases in the cost of capital, and the cash demand is much greater. Controlling shareholders that are lower down the control chain require a significant influx of cash from their listed companies to support their needs. We find that the control chain is significantly negatively related to the probability of cash dividend distributions, the level of cash dividends per share, and the payout ratio. Therefore, for state-controlled listed companies, a longer control chain results in a higher probability of cash dividend distributions, a higher level of cash dividends per share, and a higher payout ratio. This result is consistent with our internal capital market hypothesis. The rent seeking hypothesis suggests that the incentive to seek rent from other shareholders, especially the minority shareholders in China, should be positively related to the divergence of control right and cash flow right (La Porta et al., 1999; Claessens et al., 2000; Fan and Wong, 2002). The higher the divergence, the stronger the incentive to seek rent from minority shareholders, making the listed firm more likely to distribute cash dividends. The rent seeking hypothesis implies a dividend policy that is on the surface counter to the concept that payment of dividends reduces potential agency costs (Jensen, 1986). The controlling SOE directs the listed firm to do a rights offering in which the parent SOE, which holds non-tradable shares, does not subscribe. The firm then uses the proceeds of the rights offering to pay dividends. This is equivalent to the SOE selling a portion of its non-tradable shares to other shareholders. Lee and Xiao (2004) find for firms that undertake this strategy, the effective selling price is about three times higher than the price available through the officially approved private placement. In these cases, dividend payments are the outcome of the agency problem. We find that the cash flow right is significantly

positive related to the probability of a cash dividend distribution, the level of the cash dividends, and the cash dividend payout ratio. Furthermore, the greater the deviation of the control right over the cash flow right, the higher the incentive to seek rent from minority shareholders, thus the higher probability of a cash dividend distribution, the higher the level of the cash dividends per share, and the higher the payout ratio. This evidence is consistent with our rent seeking hypothesis. We also find that the likelihood of listed companies to distribute cash dividends in the prior year is positively associated with the probability that they distribute cash dividends in the next year; and cash dividends per share and the payout ratio in the prior year are consistent with those in the next year. Our results show that the dividends policies of firms listed in the Shanghai and Shenzen stock exchanges were relatively stable over the 1999 2004 period. Section 2 reviews literature related to dividend policy, particularly the cash dividend policy. Section 3 presents our hypotheses, and section 4 reports data and samples. Empirical analysis and results are presented in section 5. Section 6 concludes this paper. 2. Literature Review The determinants of firms dividend policies have long been a puzzle in the finance literature (Black, 1976). Theories of dividend policy include five streams: the bird in hand theory (Graham and Dodd, 1951); the dividend signaling theory (Miller and Modigliani ,1961; Bhattacharya, 1979, 1980; Miller and Rock, 1985; Aharony and Swary, 1980; Healy and Palepu, 1988; DeAngelo et. al, 1992); agency theory (Easterbrook, 1984; Jensen ,1986; La Porta et. al, 1998a, 1998b); the clientele effect theory (Miller and Modigliani, 1961); and behavior theory (Thaler and Shefrin, 1981; Kahneman and Tversky, 1979). It seems that signaling theory and agency theory are applicable to some extent in China (Lv and Wang, 1999; Lee and Xiao, 2003). The institutional background and especially high ownership concentration distinguish Chinese listed companies from their counterparts abroad (Lv and Wang,

1999; Yuan, 2001; Lee and Xiao, 2003; Lv and Zhou, 2005). Lv and Wang (1999) conclude that dividend policies of Chinese listed companies are mostly influenced by size, profitability, liquidity, agency costs, leverage, and ownership by the state, while the cash dividend and stock dividend are interactive. Ownership by the state influences the payout ratio of cash dividends and stock dividends: the lower the ownership by the state, the greater the potential for growth of the listed company, resulting in higher stock dividends and lower cash dividends. Other researchers in China find that the largest shareholder affects the cash dividend policy of listed companies on behalf of his or her benefits and need for cash. Yuan (2001) suggests that dividend policy abroad is a means to control the agency cost. However, in China current dividend policy is the outcome of the agency problem. Special ownership structures and Chinas corporate governance system significantly influence the firms dividend policy. Before the IPO, some controlling shareholders transfer good quality assets into the listed companies. Other controlling shareholders need cash for their operations because the cash flow from their operating activities is not sufficient. Cash from listed companies is an important channel for these controlling shareholders even if cash left in listed companies has a higher profitability. Controlling shareholders can transfer cash from listed companies by means of a cash dividend. Lee and Xiao (2003) propose two hypotheses about the cash dividend policy in Chinese listed companies: (1) The ROE enhancing hypothesis. ROE enhancing incentives have significant influence over the cash dividend policy. Companies that want to use cash dividend distributions to enhance ROA tend to distribute more cash dividends, with a much higher level and payout ratio. (2) The tunneling incentive hypothesis. The concentration of ownership has a significant effect on the cash dividend policy. To meet the cash demand of controlling shareholders, companies tend to distribute cash, following the stabilized cash dividend policy. Lv and Zhou (2005) suggest the phenomenon that large amounts of stock in the hands of controlling shareholders are not circulated to be special in Chinese securities market. The more stock control a shareholder has, the higher the probability of a cash dividend, which

means the controlling shareholders have a channel to transfer resources from listed companies. Thus, in China the listed firms ownership structure may have an impact on dividend policy, especially the cash dividend. However, previous research on dividend policy of firms in China has not included the impact of ownership structure on dividend policy. In this paper we study the cash dividend policy of listed

companies in China from the perspective of the ultimate shareholder. 3. Hypotheses In financial markets such as those in the U.S., ownership is highly diverse and market power can force the management to distribute cash dividends to meet the cash demand of investors. This is less true in China. Shareholders in China, especially minority shareholders, have no power to force the management or controlling shareholders to implement dividend policies that reflect minority shareholders wishes when they differ from those of management or controlling shareholders (Yuan, 2001; Lee and Xiao, 2003). In addition, the market has the power to monitor managerial decisions in the U.S., while in China managers decisions and activities are more opaque. Different types of controlling shareholders may have different requirements of cash dividends, especially for state-owned enterprises (SOEs) and non-state-owned enterprises (NSOEs).1 In China, firms controlled by NSOEs find it more difficult to raise debt capital than firms with government ownership (Gul, 1999; Brandt and Li, 2003). This is especially true for debt financing from banks, which have been historically controlled by the state. Since they are restricted in debt financing, companies controlled by NSOEs rely more on equity financing. The greater reliance on equity increases the non-state controlled firms cost of capital compared to the state-controlled company. Thus for the same schedule of projects ranked by yield, the non-state company will find fewer profitable projects than the state-controlled firm,

SOEs are those ultimately controlled by the state while NSOEs are those ultimately controlled by non-state entities.
1

and thus will pay out more dividends to stockholders because of surplus funds. In addition, to be able to raise external equity on attractive terms, a firm will pay dividends to establish a reputation for fair treatment of minority shareholders. This would also result in higher dividends. Although Chinas government entities can force companies they control to distribute cash dividends, the key problem is how to deal with the cash collected from the dividends. Another problem is how much to distribute between the central government and the local government. This conflict between Chinas government entities affects the dividend policy of firms controlled by Chinas government bodies. Because of such unsolved problems, profits are usually left in the companies; fewer dividends are distributed by those controlled by the state. Furthermore, companies controlled by the state have an advantage in obtaining capital at lower costs and more easily than those controlled by non-state owners. (1) The probability of cash dividend distribution, the level of cash dividends, and the payout ratio of cash dividends are higher for companies ultimately controlled by non-state entities than for those ultimately controlled by state. Why do shareholders invest in companies, particularly listed companies? It may be that they not only want to have stock appreciation, but also are eager for cash dividends, especially the cash dividends when the companies are operated efficiently and profitably. The reason for listed companies to distribute cash dividends is because the ultimate shareholders have much cash flow rights in the listed companies. Previous research such as Lv and Wang (1999), Yuan (2001), Lee and Xiao (2003), Lv and Zhou (2005) have used the control right to proxy the controlling shareholders expropriation incentive. Their findings indicate that control right has a great influence on the cash dividend. We contend that the incentive to obtain cash dividends is based on cash flow rights; and that their results hold because control rights are positively related to cash flow rights. Our hypothesis focuses directly on cash flow rights. (2) The higher the cash flow right of ultimate shareholders, the higher the probability of cash dividend distributed, the higher the level of cash dividends, the

higher the cash dividend payout ratio distributed from listed companies. According to Jensen and Mecklings (1976) theoretical framework, a highly diverse ownership structure and the separation of ownership and control of the firms resources can lead to severe agency costs. Managers, who control the firm, may expropriate value from the firm through perks and other means. The payment of cash dividends can reduce this problem since management will have fewer resources available to expropriate (Jensen, 1986; La Porta et al. 2000). Faccio et al. (2002) propose that dividends used as a means to restrain the tunneling conduct of insiders is applicable in Asia and Europe. But in China the payment of dividends can be the outcome of the agency problem rather than a means to control the agency cost (Yuan, 2001; Lee and Xiao, 2003). As a reflection of Chinas economic transition, most listed firms in China were carved out from state-owned enterprises (SOEs). The parent SOE holds the non-tradable state shares of the listed firm, and the new shareholders from the IPO hold tradable shares (Lv and Zhou, 2005). The nontradable shares can be traded only with private placement between institutions under special permission from the government. The parent SOE directs the listed firm to undertake a rights offering in which the parent SOE does not subscribe. The firm then uses the proceeds of the rights offering to pay dividends. This is equivalent to the SOE selling a portion of its non-tradable shares to other shareholders. Lee and Xiao (2004) find that the computed selling price is about three times higher than the price officially approved through private placement. In these cases, dividend payments are the outcome of the agency problem; controlling shareholders use cash dividends to expropriate funds from the firm (Yuan, 2001; Lee and Xiao, 2003). The incentive to seek rent from other shareholders, in China especially the minority shareholders, should be positively related with the divergence of control right and cash flow right (La Porta et al., 1999; Claessens et al., 2000; Fan and Wong, 2002). The higher the divergence, the stronger the incentive to seek rent from the minority shareholders through the rights issue-dividend payment

strategy.2 Since both the signaling effect and the benefit transferring effect have the same results according to the divergence of control right and cash flow right, which effect is more reasonable in China is uncertain. To distinguish the signaling incentive and the benefit transferring incentive, we add another variable, free cash flow (FCF), into the model. FCF can be proxy for the signaling effect; if the coefficient for this variable is not significant, we can accept it for the other reason, which is the benefit transferring incentive. (3)The higher the divergence of control right and cash flow right, the higher the probability of cash dividends, the higher the level of cash dividends, the higher the cash dividend payout ratio. It has been advocated that the longer the control chaini.e., the corporate layersof the firm, the more powerful the internal investment markets work in the firm. This has two elements. First, investable funds can be more easily allocated within the firm. Funds may be allocated among firms in the chain in order to use more of the available funds (Williamson, 1985; Stein, 1997). Second, Fan et al have found that in China the pyramidal structures are used to cross subsidize members of the chain. Ultimate shareholders and controlling shareholders have more financing channels using multilayer control. Thus debt funds are more available, which reduces the cost of capital. Both of these will lead to lower dividends for non-state owned firms. But for stateowned companies, Fan and Wong (2005) suggest that a longer control chain means a greater influence by market forces, and thus government intervention and support decline as the control chain increases. Thus, as the control chain of a state-controlled firm increases, the uncertainty from regulatory changes increases and the ease of bank debt financing declines. Thus the cost of capital rises, more investments become unprofitable and the firm will pay more dividends.

In order to control for the illegal means, we use another variable, ARECNO, to proxy for this effect. Ma et al. (2005) define ARECNO as other accounts receivable divided by total assets, which can be regarded as a proxy for the cash engrossed directly by the controlling shareholder, since it is a common practice in China.
2

(4) For state owned firms, as the control chain lengthens, the higher the probability of cash dividends, the level of cash dividends and the level of cash dividends per share that the listed companies distribute. For non-state owned firms a longer control chain results in the opposite effects. 4. Data and Sample 4.1 Data Sources Chinese listed companies have been required to disclose cash flow statements in their annual financial reports since 1998. To make the financial data consistent in our sample firms, we collect data from 1999. Our sample includes companies listed in Chinas stock market from 1999 through 2004. The companies issued only A-shares or A-shares and other types of shares, such as B, H or S. Investors external to China represented by investors in the B, H and S sharesare subject to different laws and regulations than domestic China investors. We seek to avoid possible distortion in our results for domestic Chinese markets (Lee and Xiao, 2003). Thus in our robust tests we exclude firms that issue B shares, H shares or S shares in addition to A-shares. Our data on ownership structure was excerpted manually from the 1999 to 2004 annual financial reports of Chinese listed companies. For each firm, we collected information on the control rights of controlling shareholders, superior shareholders, and ultimate shareholders. Then we computed the divergence of control rights and cash flow rights using the same method as La Porta et al. (1999), Claessens et al. (2000) and Fan and Wong (2002). We also recorded information on the ultimate shareholders if disclosed in the annual financial reports. However, if a firm did not disclose enough ownership structure information, we searched their websites and other sources to identify the ultimate shareholders. Cash dividends and other financial data are from Genius Database, a widely cited professional database in China. In order to minimize data selection bias such as that for missing data, we further examined their annual reports to minimize the problem of missing observations. Finally, after dropping those whose ultimate shareholders could not be identified

or had other missing information, we were left with a sample size of 6,649 from 1999 to 2004. Dropping 33 observations in financial industry and 85 outliers from 1999 to 2004, there are 6531 observations in final regressions, 847 in 1999, 990 in 2000, 1070 in 2001, 1151 in 2002, 1214 in 2003 and 1259 in 2004. The sample selection process was reported in Table 1. (Insert Table 1 about here) 4.2 Variables 4.2.1 Cash Dividend Policy (DIVAT, PREDIV, DPS, PREDPS, and PAYOUT, PREPAYOUT) We now introduce the variables describing dividend policy. DIVAT indicates whether the listed company distributesd cash dividends in the current year (1 = yes, 0 = no). PREDIV specifies whether this firm m distributed cash dividends in the prior year (1 = yes, 0 = no). DPS is the cash dividend per share in the current year and

PREDPS is the cash dividend per share in the prior year. PAYOUT is the cash dividend payout ratio, which equals the cash dividend per share divided by the current earnings per share. PREPAYOUT is the cash dividend payout ratio for the prior year. 4.2.2 Ownership Structure (V, C, CV, State and Chain) As in Liu et al. (2003), Lai and Wu (2003), and Xia and Fang (2005), ultimate shareholders are divided into two categories: state and non-state. STATE (1 = yes, 0 = no) is the resulting indicator variable. Further, in order to investigate the influences of different government authorities, we classified the State into central government (CentralGov) and local government (LocalGov), both are dummy variables. Since many controlling shareholders not only control listed companies directly, but also control them indirectly through their subsidiaries invested in the same companies, the control right of the ultimate shareholder, V, is the sum of the bottom level control rights, allowing for both indirect control and multiple controls. The measure of ownership, namely the cash flow right (C), is the same as that used by La Porta et al.

(1999), Claessens et al. (2000) and Fan and Wong (2002). They define cash flow right as the product of each control right in the control chain. When measuring this variable we also consider indirect control and multiple controls. The divergence of the control right and the cash flow right is CV, calculated as the cash flow right divided by the control right. Since we identify all controlling parties, we obtain the length of the control chain. The control chain, CHAIN, represents the agent chain and the proxy for the power of the internal capital market from the ultimate shareholders to the listed companies, though not very precisely (Williamson, 1985; Stein, 1997; Fan et al, 2005). The interaction term STATECHAIN (calculated as STATE*CHAIN) reflects the association between the length of the control chain for state-owned companies. 4.2.3 Control Variables (ARECNO, FCF, FCFPS, ROA, EPS, PREFINANCE, STDIV, STDIVPS and FIXED) Since growing firms need cash for their investments, they tend to pay less cash dividends. Growth is a key determinant of the dividend policy, thus we use the revenue growth, calculated by the one year revenue growth rate, to control for this effect. ARECNO measures the cash embezzled by the controlling shareholders. Since controlling shareholders and ultimate shareholders can tunnel the listed companies both by expropriating directly and by cash dividends, to investigate the influence of ownership structure on dividend policy, or the legal means, we should control for the illegal means. Ma et al. (2005) define ARECNO as other accounts receivables divided by total assets, which can be regarded as a proxy for the cash expropriated directly by the controlling shareholder, since it is a common usage in China. FCF is the free cash flow, which is equal to net cash flow from operating activities minus cash expenditures on acquisition of fixed assets, intangible assets and other long-term assets. FCF is scaled by total assets at the end of the year to eliminate the size effect. This variable is used to control for the relationship between dividends and free cash flow affect under agency cost theory (Jensen, 1986; Lee and Xiao, 2003)

and the signaling incentive (La Porta et al., 2001; Faccio et al., 2002). FCFPS is the free cash flow per share, equal to free cash flow divided by total shares at the end of the year. We control for the relationship between profitability and dividends by including ROA and EPS as independent variables. ROA is calculated as net income divided by total assets at the end of the year; and EPS is the earnings per share for the current year. PREFINANCE is used to reflect the tunneling hypothesis proposed by Lee and Xiao (2003). PREFINANCE (1 = yes, 0 = no) indicates whether the company launched a seasoned offering in the prior year. A positive coefficient for PREFINANCE indicates that the seasoned offering enhances the incentive of the tunneling. STDIV (1 = yes, 0 = no) indicates whether the company distributed a stock dividend. STDIVPS is the stock dividend per share. We also use the total debt ratio (LEV) to control for the effect of financial leverage. We also control for industry by including indicators for the 12 industry categories used by the CSRC after dropping the financial industry: A. agriculture, forestry, herd and fishery; B. mining; C. manufacturing; D. electricity, gas and water supply; E. construction; F. traffic, storage and post; G. electron city; H. wholesale and retail; J. estate; K. social service; L. culture, sports and entertainment; and Z. general. In regressions we use 11 dummy variables and Z as the base. To eliminate the influence of macro-economy among different years, we also include indicator variables to reflect the six years 1999 through 2004. In the tables that report our regression results, we use Yeardummy and IndDummy to indicate the industry and year effects. 5. Empirical Analysis 5.1 Statistical Description
5.1.1 Cash Dividend Policy

Table 2 presents the descriptive statistics frequencies of DPS and PAYOUT of the all listed firms from 1999 through 2004. For those companies that distribute cash dividends, the DPS is about RMB 0.14 per share on average from 1999 to 2004,

which translates to an average payout ratio of 54%. Indeed several companies still paid cash dividends although they suffered losses in that year. In 2001, both the DPS and PAYOUT seem to be different from those in other years, which may be due to the the CSRCs new regulation for equity refinancing required listed companies to distribute cash dividends. In robustness check, we check the structural change in cash dividend distribution before 2001 and after that year. (Insert Table 2 about here) To illustrate the cash dividend policy of listed companies in China intuitively, we report the distributions of DIVAT, DPS and PAYOUT in Figures 1 to 3. Figure 1 shows the DPS distribution. Horizontal axle indicates the DPS, while vertical axle shows the fraction. Figure 1(a) gives the total sample DPS distribution. Approximately half samples do not distribute cash dividends, 0 each share. And more than 40% of the rest distribute less than RMB 0.2 per share. Figure 1(b) displays the distribution in each sample year. Results are basically the same except that a higher proportion of companies distribute cash dividend in 2000 and 2001 compared with 1999. In addition, companies seem to distribute more cash dividends in 2000 and 2001. Figure 1(c) reveals the distribution among companies controlled by the central government, local governments and private entities. It appears that SOEs distribute more cash dividends than NSOEs. Figure 2 shows the PAYOUT distribution. The horizontal axis indicates the PAYOUT ratio, while vertical axis shows the fraction. Figure 2(a) shows the total PAYOUT distribution, Figure 2(b) displays the sample year distribution and Figure 2(c) shows the distribution among companies controlled by central government, local governments and private entities. All results are basically consistent with figures and conclusions above. (Insert Figures 1 and 2 about here)

5.1.2 Control Chain

In this paper we attempt to further investigate the control chain from the ultimate

shareholders to their controlled listed companies, which is a proxy for the internal capital market. Table 3 shows the control chain distribution of sample firms in each category and in each year. (Insert Table 3 about here) Panel A shows the distribution of total sample firms. For both SOEs and NSOEs, most listed companies are controlled by ultimate shareholders through two or three layers. Central government is more likely to control listed companies through

multiple layers than local governments. Panel B gives the distribution in each sample year. Both the central government and local governments tend to decentralize their power, which results in a lower percentage of listed companies directly controlled by the state. An increasing amount of listed companies are controlled by the state through more layers, which results in the descending proportion of companies in 1 and 2 layers. This phenomenon is also presented in listed companies controlled by NSOEs. Figure 3 shows the graphs for the sample density of the distribution of control chain in each category and in each year. (Insert Figure 3 about here)
5.1.3 Divergence of Cash Flow Rights and Control Rights

One of our focuses is on the influence of the agency problem coming from the divergence of cash flow rights and control rights (voting rights); thus Table 4 gives the CV distribution of sample firms in detail. (Insert Table 4 about here) Panel A reveals the distribution of total sample on CV. The average CV for state controlled firms is 0.9217, 0.8429 for central government-controlled firms and 0.9470 for local government controlled firms, while the mean CV is 0.6462 for firms controlled by NSOEs. The mean CV in Panel B for State-controlled firms also indicates that the government bodies decentralize their powers, resulting in lower mean CVs from 1999 through 2004. We should also note that more than half of the sample state-controlled firms do not have a separation of control right and cash flow right. We observed that private entities tend to use less cash if they have more control

power on the listed companies, which is consistent with La Porta et al. (1999), Claessens et al. (2000) and Fan and Wong (2002). Figure 4 illustrates the CV distribution in each category and in each sample year. (Insert Figure 4 about here)
5.1.4 Other Regression Variables

Table 5 shows the descriptive statistics of regression variables. Average ROA for the six years is 2.12% and median ROA is 3%, showing that the return and profitability of listed companies is low in those years. Mean EPS is RMB 0.15, while the median is RMB 0.17. Both the profitability indicator show great deviation, revealing the distinguished difference in the return on investment in China. The control right of ultimate shareholders is 45.89% on average, while the cash flow right is 40.45%, and divergence of these two rights are not severe in Chinese listed companies, especially for those controlled by state. (Insert Table 5 about here) 5.2 Model Specification 5.2.1 Linter Dividend Model
Our model is principally based on the Linter (1956) dividend model, such that

Dit = ri Pi ,t and Dit Di ,t 1 = i + ci ( Dit * Di ,t 1 ) + i

Dit * is the objective dividend payout; ri is the objective payout ratio;

Pi ,t is earnings per share; Dit and Di ,t 1 are cash dividends in year t and year t-1.
Adjusting those models, we are left with:

Di ,t = + 1 Pi ,t + 2 Di ,t 1 + i ,t 5.2.2 Our Dividend Model First, we use the discrete choice model to examine how the ownership structure affects the cash dividend policy of listed companies, particularly whether the company distributes cash dividends or not. The Probit model on the determinants of

cash dividends is as follows:3

DIVAT = + 1 * PREDIV + 2 * STATE(CenterGov, LocalGov) + 3 * C + 4 * CV +5 * CHAIN + 6 * STATECHAIN + 7 * ARECNO + 8 * GROWTH + 9 * ROA + 10 * FCF +11 * PREFINANCE + 12 * STDIV + 13 * LEV + i *INDSDUMMY
i =14 25

+ j *YEARDUMMY +
j =26

30

Then, we investigate the influence of ownership structure on the amount of cash dividends per share. The linear regression (OLS) model on the determinants of cash dividends per share is as follows:

DPS = + 1 * PREDPS + 2 * STATE(CenterGov, LocalGov) + 3 * C + 4 * CV +5 * CHAIN + 6 * STATECHAIN + 7 * ARECNO + 8 * GROWTH + 9 * EPS +10 * FCFPS + 11 * PREFINANCE + 12 * STDIVPS + 13 * LEV + i *INDSDUMMY
i =14 25

+ j *YEARDUMMY +
j =26

30

Finally, the influence on the cash dividend payout ratio is examined using the ownership structure. The OLS model on the determinants of the cash dividend payout ratio is as follows:

PAYOUT = + 1 * PREPAYOUT + 2 * STATE(CenterGov, Loca l Gov) + 3 * C + 4 * CV +5 * CHAIN + 6 * STATECHAIN + 7 * ARECNO + 8GROWTH + 9 * ROA + 10 * FCF +11 * PREFINANCE + 12 * STDIV + 13 * LEV + i *INDSDUMMY
i =14 25

+ j *YEARDUMMY +
j =26

30

We use Whites adjusted t statistics to adjust for hetero-scedasticity that may be prevalent in our cross-sectional data.

We also use the Logit model as a robustness check for the Probit discrete model.

5.3 Empirical Results Table 6, 7 and 8 are respectively the Probit model predicting whether the firm pays a cash dividend, the OLS model predicting the amount of cash dividend, and the OLS model predicting the dividend payout ratio. Each of these tables reports the results of six regressions. The first two regressions use all of the sample firms. As a robustness check we use the definition of ultimate shareholder in La Porta et al. (1999), Claessens et al. (2000) and Fan and Wong (2002); namely, the control right exceeds 20%. The next two regressions show the results based on this definition. In the last two regressions we avoid the effect of foreign investors influence, by dropping the firms that issue both A shares and other type of shares, such as B, H or S. 4 In each of the sub-sample we further investigate the distinction under the influence of different government, including central government and local government. The coefficients reflecting whether the firm paid cash dividends, the level of cash dividend and the payout ratio in the prior year are significantly positive. Companies distributing dividends last year have a higher probability of paying dividends this year with the same amount and the same proportion of cash dividends from earnings. As observed by previous studies on corporate control in China, it has been easier in the Chinese system than in other systems (the U.S. for example) for controlling shareholders to directly expropriate funds from listed firms. However, direct expropriation is illegal. Therefore, cash dividends are regarded as an alternative method for controlling shareholders to obtain funds from the firm. Coefficients for ARECNO are significantly negative in all three regressions in Tables 6, 7 and 8, indicating that cash dividend and expropriation are two complementary artifices for controlling shareholders to tunnel listed companies, which is consistent with Ma et al. (2005). Growth is significantly positively related with the probability of cash dividend distribution in the whole sample in Table 6, not significantly in other sub-samples in
4

The same approach used by Lee and Xiao (2003).

Table 6, inconsistent with theory predicts. However, it may be explanatory since growth firms will distribute cash dividend in order to attract investors for their firms to finance more to invest. Growth is negatively related with the cash dividend per share in Table 7 though not significantly, and it is significantly negative in payout ratio determination in Table 8, consistent with the theory. A firms profitability affects the probability of cash dividend distribution: a higher return on assets predicts a higher probability of paying a cash dividend. This finding is consistent with Lv and Wong (1998), Yuan (2001) and Lee and Xiao (2003). According to agency theory (Easterbrook, 1984; Jensen ,1986; La Porta et. al, 1998a, 1998b) and signaling theory (La Porta et al., 2001; Faccio et al., 2002), the more free cash flow in listed companies, the higher the probability of a cash dividend distribution. But our results are that the coefficient for FCF is significantly negative in Table 6 and insignificant in Table 8 and positively significant in the whole sample regression in Table 7, inconsistent across all the regressions and also inconsistent with the result of Lee and Xiao (2003). Since the CSRC and other regulatory authorities required the distribution of cash dividends for equity refinancing after 2001, different sample periods may result in different findings. Lee and Xiao (2003) use the sample period from 1993 to 2001, but we use the sample period from 1999 to 2004. Firms that issued a seasoned offering in the prior year are less likely to pay dividends in the current year. This finding is inconsistent with Lee and Xiaos (2003) results. This may be due to the regulatory changes of the CSRC and other regulatory authorities that require seasoned offerings with cash dividend distributions. Another explanation is that companies issued seasoned offering last year tend to do more investments and have less cash to distribute dividend. We also find that the distribution of stock dividends is positively related to the probability of distributing cash dividends, which is inconsistent with Lee and Xiao (2003). This seems to be reasonable because listed companies tend to pay dividend both in cash and in stock in order to attract the investors and comply with the regulation of CSRC. In Table 6, we document that distributing stock dividends (STDIV) is positively

related to the probability of distributing cash dividends, which is inconsistent with Lee and Xiao (2003). While in Table 7 and Table 8, this variable is significantly negatively related with the DPS and PAYOUT ratio, consistent with Lee and Xiao (2003). Leverage is significantly negatively related to the probability of distributing cash dividends and the payout ratio, consistent with our prediction that firms with higher debt ratios distribute less cash dividends due to debt restrictions or capital rationing. We expect that non-state entities have a greater need to obtain cash for ordinary use, other operating activities, or investment compared with state enterprises. In Tables 6 and 8, the coefficients for STATE, also CentralGov and LocalGov, are insignificant negative in all regressions. Results show that the probability of cash dividend distribution and the payout ratio are not significantly different among SOEs and NSOEs. Local government and central government also show no significantly influence on the cash dividend payout ratio and probability on listed companies. However, the coefficients for STATE are significantly negative in all regressions in Table 7. This may indicate that the probability for companies controlled by the government and for non-state entities to distribute cash dividends is not significantly different. Whereas, the amount of cash dividends and the payout ratio are all significantly higher for NSOEs than for SOEs. When categorize the State into central government and local government, the results of regression analysis show that companies controlled by local government distribute cash dividends per share significantly lower than those controlled by central government and private entities. Local government has more incentive to support the listed companies for the benefits of local economy and other social liabilities. These findings basically support our predictions. The cash flow right is positively related to the probability of a cash dividend distribution in all regressions, consistent with our hypothesis. Divergence of the control right and the cash flow right has a negative effect on the decision to distribute a cash dividend. The more control right exceeds the cash flow right, the higher the

incentive to seek rent from minority shareholders, thus the higher the probability of a cash dividend distribution. This may be due to the signaling incentive, but incorporating the effect of FCF, these results in each of the three categories of samples are consistent with our rent seeking hypothesis. These results in each of the three categories of samples in Tables 6, 7, and 8 are consistent with our hypothesis. The length of the control chain is significantly negatively related to the DIVAT, DPS and PAYOUT in all regressions in Tables 6, 7, and 8. The longer the control chain, the more powerful the internal capital market, so ultimate shareholders need not transfer more cash from listed companies. Cash may be used for other investment activities or acquisitions. However, the coefficient for STATECHAIN is significantly positive in all regressions, showing that the longer control chain, the more severe the agency problem. Longer control chain of the state-owned companies cannot seek financing and other support from the government as easily as those directly controlled by the government. Results in each of the three categories of samples in Tables 6, 7 and 8 on the control chain are all consistent with our hypothesis. (Insert Tables 6, 7, and 8 about here) 5.4 Robustness test
5.4.1 Systematically Change

On March 28, 2001, the CSRCs new regulation for equity refinancing required listed companies to distribute cash dividend. Thus, the cash dividend policy may change systematically after that year. It has been observed that cash dividends and related party transactions are means for controlling shareholders to transfer resources from listed companies in China (Lee and Xiao, 2003; Lv and Zhou, 2005). However, cash dividends have become a requirement for listed companies that issue new shares since 2001. Meanwhile, regulations on related party transactions are becoming more restrictive. On December 10, 2001, the CSRC issued Regulations on acquisition, sales and asset exchange of listed companies. In addition, the Ministry of Finance issued Rules on accounting procedure on asset sales between related parties on December 21, 2001. Those regulations significantly reduced the operation of related

party transactions, while enhancing the role of cash dividends. To investigate the influence of those regulations, we divide our data into two time periods: 1999 to 2001, and 2002 to 2004. (Insert Tables 9, 10, and 11 about here) In Table 9, State, both central government and local government, is still not significantly in all time periods. Ownership structure influence seems to be stronger in A-share sub-sample, both before 2001 and after 2001. In Table 10, government influence seems to be more significantly pervasive before 2001. And the tunneling effect is more obvious after 2001. However, the government seems to have more influence after 2001 when we analyze the cash dividend payout ratio in Table 11. Generally speaking, the regulations seem to have an influence on the cash dividend policy, payout ratio and DPS after 2001. Since some companies pay out cash dividends even if they suffer losses in some years, the payout ratio and the prepayout ratio are negative, and those cases may be quite different from the others. Companies in the financial industry have the different characteristics in financial data and they are excluded from the regression samples. In our robustness check, we include the whole samples into the regression. Therefore, we have 6649 observations. The results are even more significant, which are consistent with our findings.
5.4.3 Only ownership structure as explanatory variables

Because the DIVAT and PREDIV are highly correlated, so are DPS and PREDPS, and PAYOUT and PREPAYOUT. PREDPS and PREPAYOUT may capture most of the explanatory power. We also drop those variables for sensitivity analysis. The results are the same as above, and dropping the variables for the prior year does lower the power of the test; however, ownership structure still explains much of the cash dividend policy of listed companies. 6. Conclusion In a well developed securities market, ownership is highly diverse. Market power may force the management to distribute cash dividends to meet the cash demand of

investors. In an emerging market like the Chinese stock market, investors, especially the minority shareholders, do not have enough power to force the management or controlling shareholders to distribute cash dividends. Controlling or ultimate shareholders demand for cash influence managerial decision on cash dividends. We investigate the cash dividend policy of listed companies in China from perspectives of firms ownership structures and chains of control. We find that the level of cash dividends is higher for companies ultimately controlled by non-state entities than for those ultimately controlled by the state; whereas the probability of cash dividend distribution and the cash dividend payout ratio are not significantly different. Even in the SOEs, central government and local government have different incentives and thus the influence on dividend. We also document that the higher the cash flow right of ultimate shareholders, the higher the probability of cash dividends, the higher the level of cash dividends, and the higher the level of cash dividend payout ratio. According to the studies by La Porta et al. (1999), Claessens et al. (2000), and Fan and Wong (2002), the incentive to seek rent from other shareholders, in China especially the minority shareholders, should be positively related with the divergence of the control right and the cash flow right. Our results support this theory. That is, the higher the divergence, the stronger the incentive to seek rent from minority. Furthermore, we show that the longer the control chain, the lower the probability of cash dividends, the level of cash dividends, and the level of cash dividends per share. However, for companies ultimately controlled by the state, longer control chain will bring an opposite effect, the longer the control chain, the higher the probability of cash dividends. Regulations have much influence on the incentives of managements and controlling shareholders, and can change their behavior. In this paper, we also investigate the influence of regulation on cash dividend, showing its effects. The internal capital market is a hot topic in recent years. The corporate layers, in our paper and Fan et al. (2005), used proxy for that is somewhat simple and inaccurate, so the influence of internal capital market on cash dividend may be controversy. How to accurately proxy the efficiency and power of the internal capital

market function should attract more researchers attention. Since in 2001, CSRC issued regulations on the cash dividend of listed companies in China concerning IPO and other financing activities, the behavior of listed companies and controlling shareholders will change to some extent. Whether companies distribute cash dividend to meet those regulations and what is the consequence is much interesting, however we do not investigate this in our paper and that will be what should be further investigated.

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Table 1: Sample Selection Process Listed companies from 1999-2004 Ultimate shareholder cannot be identified Companies identified with ultimate shareholders Companies in Financial Industry Outliers: Payout>5 Payout<0 PrePayout>5 PrePayout<0 ROA<-1 EPS<-5 Lev>5 Growth>10 Total Sample 6935 286 6649 33 85 7 6 5 8 32 2 2 23 6531

Table 2: Cash Dividend Policy of Listed Companies in Each Year Panel A: Cash dividends per share in each sample year Year Number of listed Number of companies Mean companies Distribute cash dividend 1999 923 289 0.163 2000 1060 667 0.134 2001 1136 666 0.119 2002 1200 612 0.134 2003 1263 596 0.141 2004 1353 683 0.143 Total 6935 3513 0.136 Panel B: Cash dividend payout ratio in each sample year Year Number of listed Number of companies Mean companies Distribute cash dividend 1999 923 289 0.598 2000 1060 667 0.538 2001 1136 666 0.483 2002 1200 612 0.566 2003 1263 596 0.524 2004 1353 683 0.574 Total 6935 3513 0.542 Min 0.010 0.010 0.010 0.004 0.005 0.005 0.004 Min 0.05 0.03 -5.00 -2.00 -1.25 0.02 -5.00 Median 0.14 0.10 0.10 0.10 0.10 0.10 0.10 Median 0.508 0.435 0.441 0.512 0.452 0.455 0.459 Max 0.80 0.70 0.66 0.60 1.00 1.00 1.00 Max 5.88 10.00 4.00 3.75 3.75 14.29 14.29

Figure 1: The Distribution of Dividends Per Share (DPS)

Figure 1(a)
.5 F c n ra tio 0 0 .1 .2 .3 .4

.2

.4 DPS

.6

.8

Figure 1(b)
1999
.6

2000

2001

F raction

.2

.4

2002
.6

2003

2004

0 0 Graphs by Y ear

.2

.4

.5

.5

.5

DPS

Figure 1(c): C: Central government controlled firms, L: Local government controlled firms, P: Non-state controlled firms
C
.6

F raction

.2

.4

.5

P
.6 0 0
Graphs by Catgory

.2

.4

.5

DPS

Figure 2: Distribution of Payout Ratio in sample firms

Figure 2(a)
.5 F c n ra tio 0 0 .1 .2 .3 .4

2 PAYOUT

Figure 2(b)
1999
.8

2000

2001

F ctio ra n

.2

.4

.6

2002
.8

2003

2004

-1.18e-09 Graphs by Y ear

.2

.4

.6

5 -1.18e-09

5 -1.18e-09

PAYOUT

Figure 2(c): C: Central government controlled firms, L: Local government controlled firms, P: Non-state controlled firms

C
.6

F raction

.2

.4

-1.18e-09

P
.6 -1.18e-09
Graphs by Catgory

.2

.4

PAYOUT

Table 3: Statistic Description on the Control Chain Panel A: Distribution by ownership 1 403 65 338 141 544 2 3,199 451 2,748 673 3,872 CHAIN 3 1,337 600 737 390 1,727 4 207 116 91 100 307 5 45 33 12 36 81 Total 5,191 1,265 3,926 1,340 6,531

STATE CentralGov LocalGov PRIVATE TOTAL

Panel B: Distribution by year State 1999 CentralGov LocalGov 2000 CentralGov LocalGov 2001 CentralGov LocalGov 2002 CentralGov LocalGov 2003 CentralGov LocalGov 2004 CentralGov LocalGov Private 1999 2000 2001 2002 2003 2004 Total 1999 2000 2001 2002 2003 2004 1 89 7 82 80 8 72 70 11 59 60 12 48 51 13 38 53 14 39 1 20 22 20 22 23 34 1 109 102 90 82 74 87 2 451 59 392 524 68 456 551 72 479 558 76 482 562 86 476 553 90 463 2 53 76 94 122 154 174 2 504 600 645 680 716 727 CHAIN 3 167 77 90 205 94 111 229 105 124 237 105 132 246 108 138 253 111 142 3 25 36 47 77 96 109 3 192 241 276 314 342 362 4 22 11 11 28 14 14 35 19 16 41 23 18 43 26 17 38 23 15 4 10 8 13 20 22 27 4 32 36 48 61 65 65 5 6 5 1 6 5 1 6 5 1 8 6 2 9 6 3 10 6 4 5 4 5 5 6 8 8 5 10 11 11 14 17 18 total 735 159 576 843 189 654 891 212 679 904 222 682 911 239 672 907 244 663 total 112 147 179 247 303 352 total 847 990 1070 1151 1214 1259

Figure 3: The Distribution of Control Chain of Sample Firms

Figure 3(a)
.6 F c n ra tio 0 1 .2 .4

3 Chain

Figure 3(b)
1999
.6

2000

2001

F raction

.2

.4

2002
.6

2003

2004

0 1

.2

.4

Chain
Graphs by Y ear

Figure 3(c): C: Central government controlled firms, L: Local government controlled firms, P: Non-state controlled firms

C
.6 .8

F raction

.2

.4

P
.6 0 1 .2 .4 .8

Chain
Graphs by Catgory

Table 4: Statistic Description on the CV Panel A: Distribution by ownership N 5191 1265 3926 1340 6531 Mean 0.9217 0.8429 0.9470 0.6462 0.8651 CV SD 0.1881 0.2618 0.1485 0.3014 0.2431 Min 0.0199 0.0199 0.1346 0.0171 0.0171 Median 1 1 1 0.6631 1 Max 1 1 1 1 1

STATE CentralGov LocalGov PRIVATE TOTAL

Panel B: Distribution by year State 1999 CentralGov LocalGov 2000 CentralGov LocalGov 2001 CentralGov LocalGov 2002 CentralGov LocalGov 2003 CentralGov LocalGov 2004 CentralGov LocalGov Private 1999 2000 2001 2002 2003 2004 Total 1999 2000 2001 2002 2003 2004 N 735 159 576 843 189 654 891 212 679 904 222 682 911 239 672 907 244 663 N 112 147 179 247 303 352 N 847 990 1070 1151 1214 1259 Mean 0.9447 0.8732 0.9644 0.9399 0.8642 0.9618 0.9298 0.8478 0.9554 0.9197 0.8361 0.9469 0.9025 0.8214 0.9313 0.8993 0.8296 0.9249 Mean 0.6643 0.6599 0.6493 0.6395 0.6352 0.6473 Mean 0.9077 0.8984 0.8828 0.8600 0.8358 0.8288 CV SD 0.1619 0.2504 0.1200 0.1657 0.2492 0.1240 0.1806 0.2637 0.1357 0.1899 0.2655 0.1481 0.2071 0.2715 0.1699 0.2076 0.2632 0.1763 SD 0.3075 0.2934 0.2979 0.3030 0.3065 0.3008 SD 0.2102 0.2145 0.2300 0.2474 0.2626 0.2628 Min 0.0361 0.0361 0.1807 0.0361 0.0361 0.1807 0.0361 0.0361 0.1448 0.0361 0.0361 0.1448 0.0361 0.0361 0.1444 0.0199 0.0199 0.1346 Min 0.0971 0.0971 0.0971 0.0562 0.0171 0.0171 Min 0.0361 0.0361 0.0361 0.0361 0.0171 0.0171 Median 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 Median 0.70 0.70 0.70 0.65 0.65 0.67 Median 1 1 1 1 1 1 Max 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 Max 1 1 1 1 1 1 Max 1 1 1 1 1 1

Formatted: Left

Figure 4: The Distribution of the Divergence of the Control Right and the Cash Flow Right (CV) of Sample Firms Figure 4(a)
.8 F ction ra 0 0 .2 .4 .6

.2

.4 CV

.6

.8

Figure 4(b)
1999
.8

2000

2001

Fraction

.2

.4

.6

2002
.8

2003

2004

0 0 Graphs by Y ear

.2

.4

.6

.5

.5

.5

CV

Figure 4(c): C: Central government controlled firms, L: Local government controlled firms, P: Non-state controlled firms
C
.8

Fraction

.2

.4

.6

.5

P
.8 0 0
Graphs by Catgory

.2

.4

.6

.5

CV

Table 5: Descriptive Statistics DIVAT, the dependent variable, is a dummy variable. One indicates the listed company distributing cash dividends at current year, zero otherwise; PREDIV is also a dummy variable. One indicates the listed company distributing cash dividends at prior year, zero otherwise; DPS, the dependent variable, the cash dividends per share listed company distributes in current year; PREDPS is the cash dividends per share distributed by the listed company at prior year; PAYOUT, the dependent variable, the cash dividend distributed by the listed company from its earnings in current year; PREPAYOUT is the cash dividend distributed by the listed company from its earnings at prior year; ROA: Return on Asset=Net income/Total assets at the end of the year; EPS: earnings per share, EPS=Net income/Total shares at the end of year; FCF: the free cash flow=(Net cash flow from operating activities- cash expenditures on acquisition of fixed assets, intangible assets and other long-term assets)/Total assets at the end of year; FCFPS: the free cash flow=(Net cash flow from operating activities-cash expenditures on acquisition of fixed assets, intangible assets and other long-term assets)/Total shares at the end of year; PREFINANCE, a dummy variable, 1 indicates that the listed company launched a seasoned offering in prior year, 0 otherwise; STDIV, a dummy variable, 1 indicates that the listed company distributes stock dividends, 0 otherwise; STDIVPS the stock dividends per share distributed by the listed company in current year; ARECNO, capital expropriated by the controlling shareholder, equals to the other receivables divided by total asset; GROWTH, revenue this year divided by the revenue last year; LEV: the leverage of debt, equals to the total debt divided by the total assets at the end of the year; V: Control right of ultimate shareholder; Sum of the bottom level control rights of ultimate shareholder allowing for indirect control and multiple controls; C: Ownership right (the cash flow right): The product of each control right through the control chain; CV: the divergence of the control right and the cash flow right, CV=C/V; Chain: Agent chain from the listed companies (the bottom of the pyramid) to the ultimate shareholders; StateDummy variable, 1 indicates that the ultimate shareholder is the government, and 0 denotes the companies owned by non-state entities. Variables N Mean STD Min Median Max DIVAT 6531 0.5188 0.4997 0 1 1 PREDIV 6531 0.4699 0.4991 0 0 1 DPS 6531 0.0709 0.1014 0 0.02 1 PREDPS 6531 0.0644 0.1005 0 0 1.25 PAYOUT 6531 0.2757 0.3847 0 0.12 4.88 PREPAYOUT 6531 0.2492 0.3786 0 0 4.88 ROA 6531 0.0212 0.0842 -0.99 0.03 0.51 EPS 6531 0.1507 0.3521 -3.11 0.17 2.88 FCF 6531 -0.0194 0.1000 -0.75 -0.01 0.74 FCFPS 6531 -0.1416 0.6975 -8.36 -0.05 9.77 PREFINANCE 6531 0.1116 0.3149 0 0 1 STDIV 6531 0.0652 0.2469 0 0 1 STDIVPS 6531 0.0128 0.0569 0 0 0.80 ARECNO 6531 0.0720 0.0965 0 0.04 1.08 GROWTH(%) 6531 23.3199 60.8088 -100 14.78 971.94 LEV(%) 6531 46.7512 25.6760 0.81 45.08 498.92 V(%) 6531 45.8877 16.9392 5.00 46.00 89.00 C(%) 6531 40.4494 19.5531 1.00 40.00 89.00 CV 6531 0.8651 0.2431 0.02 1.00 1.00

Table 6: Probit Model on the Determinants of Cash Dividend Policy

Variables PREDIV STATE CentralGov ExpSign + Model All sample 0.8666 (21.51)*** -0.1288 (-0.90) Model All sample 0.8665 (21.50) *** Model V>0.2 0.8657 (21.06) *** -0.0973 (-0.66) Model V>0.2 0.8658 (21.06) *** Model A-Share 0.7958 (18.73) *** -0.1121 (-0.77) Model A-Share 0.7961 (18.74) ***

Deleted: **, **, and * denote statistical significance at the 0.01, 0.05, and 0.10 level, respectively.
Section Break (Next Page)

-0.0490 -0.0350 -0.0384 (-0.31) (-0.22) (-0.24) -0.1178 -0.0892 -0.1021 LocalGov (-0.82) (-0.61) (-0.70) 0.4177 0.4178 0.4484 0.4474 0.5803 0.5792 C + (3.10) *** (3.10) *** (3.06) *** (3.06) *** (4.12) *** (4.12) *** -0.2265 -0.2163 -0.2439 -0.2345 -0.3402 -0.3297 CV (-1.90) * (-1.82) * (-1.94) * (-1.86) * (-2.72) *** (-2.64) *** -0.1237 -0.1221 -0.1184 -0.1171 -0.1385 -0.1371 CHAIN (-2.38) ** (-2.35) ** (-2.23) ** (-2.20) ** (-2.59) *** (-2.56) *** 0.1263 0.1131 0.1208 0.1105 0.1260 0.1139 STATECHAIN + (2.21) ** (1.94) * (2.07) ** (1.86) * (2.13) ** (1.89) * -3.8359 -3.8320 -3.8659 -3.8631 -3.8743 -3.8774 ARECNO (-10.03) *** (-10.03) *** (-9.87) *** (-9.86) *** (-10.41) *** (-10.42) *** 0.0538 0.0536 0.0544 0.0541 0.0590 0.0588 GROWTH (1.57) (1.57) (1.56) (1.58) (1.80) * (1.79) * 11.5901 11.6012 11.3555 11.3665 11.2346 11.2429 ROA + (9.43) *** (9.42) *** (9.31) *** (9.30) *** (8.82) *** (8.81) *** -0.6594 -0.6723 -0.6852 -0.6951 -0.7532 -0.7643 FCF + (-3.32) *** (-3.38) *** (-3.40) *** (-3.44) *** (-3.70) *** (-3.74) *** -0.1382 -0.1375 -0.1531 -0.1526 -0.1277 -0.1275 PREFINANCE + (-2.24) ** (-2.23) ** (-2.42) ** (-2.42) ** (-2.05) ** (-2.04) ** 0.4884 0.4893 0.4932 0.4940 0.4831 0.4840 STDIV (5.37) *** (5.39) *** (5.32) *** (5.33) *** (5.19) *** (5.21) *** -0.6266 -0.6183 -0.6366 -0.6296 -0.5718 -0.5608 LEV (-4.43) *** (-4.37) *** (-4.40) *** (-4.35) *** (-3.87) *** (-3.79) *** -0.7971 -0.8156 -0.7392 -0.7551 -0.7627 -0.7818 Constant (-3.45) *** (-3.53) *** (-3.16) *** (-3.23) *** (-3.18) *** (-3.26) *** YearDummy Control Control Control Control Control Control IndDummy Control Control Control Control Control Control N 6531 6531 6234 6234 5900 5900 Wald-Chi2 1404.98 1406.08 1327.54 1327.78 1280.80 1282.95 Pseudo R2 0.3330 0.3332 0.3289 0.3291 0.3204 0.3206 In the parentheses is the White adjusted t statistics considering the heteroscedasticity; ***, **, and * denote statistical significance at the 0.01, 0.05, and 0.10 level.

Table 7: Linear Regression on the Determinants of Cash Dividends Per Share

Variables PREDPS STATE CentralGov ExpSign + Model All sample 0.3185 (14.33) *** -0.0184 (-2.30) ** Model All sample 0.3183 (14.32) *** Model V>0.2 0.3042 (13.61) *** -0.0194 (-2.34) ** Model V>0.2 0.3040 (13.60) *** Model A-Share 0.2872 (12.47) *** -0.0170 (-2.08) ** Model A-Share 0.2870 (12.46) ***

-0.0138 -0.0116 -0.0151 (-1.59) (-1.28) (-1.67) * -0.0178 -0.0189 -0.0163 LocalGov (-2.22) ** (-2.27) ** (-1.98) ** 0.0558 0.0559 0.0646 0.0646 0.0701 0.0701 C + (6.78) *** (6.80) *** (7.28) *** (7.29) *** (7.94) *** (7.94) *** -0.0224 -0.0218 -0.0256 -0.0250 -0.0254 -0.0246 CV (-3.86) *** (-3.77) *** (-4.23) *** (-4.12) *** (-4.12) *** (-3.99) *** -0.0079 -0.0078 -0.0079 -0.0078 -0.0076 -0.0075 CHAIN (-3.06) *** (-3.03) *** (-2.99) *** (-2.96) *** (-2.88) *** (-2.84) *** 0.0045 0.0059 0.0051 0.0062 0.0055 0.0054 STATECHAIN + (1.45) (1.99) ** (1.70) * (2.03) ** (1.77) * (1.78) * -0.0504 -0.0502 -0.0506 -0.0505 -0.0507 -0.0509 ARECNO (-4.79) *** (-4.78) *** (-4.56) *** (-4.56) *** (-4.44) *** (-4.46) *** -0.0018 -0.0019 -0.0019 -0.0021 -0.0021 -0.0019 GROWTH (-1.34) (-1.43) (-1.42) (-1.45) (-1.45) (-1.35) 0.0960 0.0958 0.0984 0.0983 0.0955 0.0955 EPS + (13.87) *** (13.88) *** (13.65) *** (13.67) *** (12.82) *** (12.84) *** 0.0025 0.0024 0.0024 0.0023 0.0033 0.0032 FCFPS + (1.33) (1.29) (1.25) (1.21) (1.77) * (1.73) * -0.0057 -0.0052 -0.0052 -0.0057 -0.0070 -0.0069 PREFINANCE + (-1.64) (-1.47) (-1.45) (-1.65) * (-1.95) * (-1.94) * -0.0518 -0.0519 -0.0526 -0.0527 -0.0601 -0.0602 STDIVPS (-2.39) ** (-2.39) ** (-2.37) ** (-2.37) ** (-2.76) *** (-2.77) *** -0.0041 -0.0038 -0.0061 -0.0060 -0.0081 -0.0079 LEV (-0.96) (-0.87) (-1.69) * (-1.68) * (-1.79) * (-1.74) * 0.0315 0.0309 0.0322 0.0314 0.0281 0.0270 Constant (3.16) *** (3.09) *** (3.14) *** (3.06) *** (2.68) *** (2.57) *** YearDummy Control Control Control Control Control Control IndDummy Control Control Control Control Control Control N 6531 6531 6234 6234 5900 5900 F 57.88 56.24 53.26 51.76 51.33 49.85 R2 0.3606 0.3608 0.3570 0.3572 0.3411 0.3414 In the parentheses is the White adjusted t statistics considering the heteroscedasticity; ***, **, and * denote statistical significance at the 0.01, 0.05, and 0.10 level.

Table 8: Linear Regression on the Determinants of Cash Dividend Payout Ratio

Variables PREPAYOUT STATE CentralGov ExpSign + Model All sample 0.2198 (11.16) *** -0.0498 (-1.50) Model All sample 0.2196 (11.14) *** Model V>0.2 0.2146 (10.77) *** -0.0438 (-1.26) Model V>0.2 0.2145 (10.76) *** Model A-Share 0.2027 (9.92) *** -0.0411 (-1.19) Model A-Share 0.2026 (9.91) ***

-0.0394 -0.0372 -0.0329 (-1.07) (-0.96) (-0.85) -0.0484 -0.0429 -0.0400 LocalGov (-1.45) (-1.23) (-1.15) 0.1998 0.1999 0.2081 0.2081 0.2316 0.2315 C + (5.80) *** (5.81) *** (5.38) *** (5.38) *** (6.25) *** (6.25) *** -0.0647 -0.0634 -0.0683 -0.0673 -0.0788 -0.0776 CV (-2.60) *** (-2.55) ** (-2.52) ** (-2.48) *** (-2.92) *** (-2.87) *** -0.0359 -0.0358 -0.0343 -0.0342 -0.0359 -0.0357 CHAIN (-3.50) *** (-3.48) *** (-3.23) *** (-3.22) *** (-3.35) *** (-3.33) *** 0.0245 0.0228 0.0230 0.0220 0.0244 0.0230 STATECHAIN + (2.10) ** (1.89) * (1.91) * (1.76) * (1.99) ** (1.81) * -0.4821 -0.4817 -0.4812 -0.4810 -0.4812 -0.4813 ARECNO (-10.49) *** (-10.49) *** (-9.71) *** (-9.71) *** (-9.73) *** (-9.74) *** -0.0139 -0.0139 -0.0146 -0.0146 -0.0139 -0.0139 GROWTH (-2.55) ** (-2.54) ** (-2.48) ** (-2.49) ** (-2.38) ** (-2.38) ** 0.3553 0.3547 0.3656 0.3657 0.3198 0.3198 ROA + (6.77) *** (6.77) *** (6.47) *** (6.48) *** (5.65) *** (5.66) *** -0.0192 -0.0209 -0.0272 -0.0283 -0.0171 -0.0185 FCF + (-0.45) (-0.48) (-0.61) (-0.63) (-0.37) (-0.40) -0.0110 -0.0109 -0.0134 -0.0134 -0.0106 -0.0105 PREFINANCE + (-0.70) (-0.70) (-0.83) (-0.83) (-0.66) (-0.66) -0.0881 -0.0882 -0.0904 -0.0904 -0.0930 -0.0930 STDIV (-8.09) *** (-8.10) *** (-8.07) *** (-8.08) *** (-8.24) *** (-8.25) *** -0.1373 -0.1371 -0.1634 -0.1630 -0.1559 -0.1553 LEV (-5.99) *** (-6.00) *** (-5.95) *** (-5.92) *** (-5.98) *** (-5.96) *** 0.2845 0.2829 0.3027 0.3014 0.2885 0.2868 Constant (7.04) *** (7.00) *** (7.15) *** (7.11) *** (6.76) *** (6.71) *** YearDummy Control Control Control Control Control Control IndDummy Control Control Control Control Control Control N 6531 6531 6234 6234 5900 5900 F 49.25 47.89 47.12 45.76 44.69 43.70 R2 0.1659 0.1659 0.1629 0.1629 0.1602 0.1602 In the parentheses is the White adjusted t statistics considering the heteroscedasticity; ***, **, and * denote statistical significance at the 0.01, 0.05, and 0.10 level.

Table 9: Probit Model on the Determinants of Cash Dividend Policy on Systematically Change
Variables Model 02-04 1.0583 (19.33) *** -0.0845 (-0.42) Model 02-04 1.0583 (19.33) *** Model 99-01 0.5874 (9.75) *** -0.1943 (-0.90) Model 99-01 0.5860 (9.71) *** Model 02-04 v>0.2 1.0734 (19.24) *** -0.0227 (-0.11) Model 02-04 v>0.2 1.0734 (19.24) *** Model 99-01 v>0.2 0.5707 (9.28) *** -0.2000 (-0.90) Model 99-01 v>0.2 0.5695 (9.25) *** Model 02-04 A-Share 0.9863 (17.34) *** -0.0775 (-0.38) Model 02-04 A-Share 0.9862 (17.34) *** Model 99-01 A-Share 0.4999 (7.74) *** -0.1895 (-0.86) Model 99-01 A-Share 0.5009 (7.75) ***

PREDIV STATE CentralGov LocalGov C

CV

0.5438 (2.78) *** -0.2471 (-1.52) -0.1233 (-1.72) * 0.1027 (1.29) -5.3638 (-7.44) *** 0.1133 (2.62) *** 12.0519 (6.13) ***

-0.0718 (-0.33) -0.0831 (-0.42) 0.5430 (2.78) *** -0.2454 (-1.51) -0.1231 (-1.71) * 0.1007 ( 1.24) -5.3665 (-7.45) *** 0.1134 (2.62) *** 12.0520 (6.12) ***

0.3261 (1.74) * -0.2329 (-1.27) -0.1185 (-1.47) 0.1512 (1.73) * -3.0008 (-7.37) *** -0.0022 (-0.04) 11.2948 (10.61) ***

-0.0194 (-0.08) -0.1665 (-0.77) 0.3370 (1.79) * -0.2081 (-1.14) -0.1144 (-1.42) 0.1203 (1.35) -2.9674 (-7.27) *** -0.0035 (-0.07) 11.3407 (10.57) ***

0.5474 (2.58) *** -0.2497 (-1.46) -0.1137 (-1.54) 0.0882 (1.08) -5.4135 (-7.34) *** 0.1278 (2.67) *** 11.7811 (6.09) ***

-0.0237 (-0.11) -0.0228 (-0.11) 0.5475 (2.59) *** -0.2498 (-1.46) -0.1137 (-1.54) 0.0883 (1.06) -5.4132 (-7.34) *** 0.1278 (2.67) *** 11.7811 (6.09) ***

0.3476 (1.71) * -0.2471 (-1.28) -0.1225 (-1.47) 0.1616 (1.80) * -3.0441 (-7.27) *** -0.0254 (-0.48) 11.1491 (10.40) ***

-0.0414 (-0.17) -0.1759 (-0.79) 0.3534 (1.74) * -0.2196 (-1.13) -0.1183 (-1.42) 0.1336 (1.47) -3.0121 (-7.18) *** -0.0268 (-0.51) 11.1978 (10.36) ***

CHAIN

STATECHAIN

0.7034 (3.47) *** -0.3530 (-2.09) ** -0.1269 (-1.72) * 0.0985 (1.21) -5.3441 (-7.34) *** 0.1078 (2.43) ** 11.6794 (5.77) ***

-0.0406 (-0.18) -0.0734 (-0.36) 0.7006 (3.46) *** -0.3480 (-2.06) ** -0.1263 (-1.72) * 0.0928 (1.12) -5.3548 (-7.36) *** 0.1079 (2.43) ** 11.6818 (5.77) ***

ARECNO

GROWTH

0.5006 (2.53) ** -0.3515 (-1.80) * -0.1577 (-1.87) * 0.1700 (1.86) * -2.9720 (-7.56) *** -0.0189 (-0.34) 11.0744 (9.93) ***

-0.0644 (-0.27) -0.1699 (-0.77) 0.5052 (2.55) ** -0.3302 (-1.69) * -0.1545 (-1.84) * 0.1479 (1.59) -2.9609 (-7.53) *** -0.0202 (-0.37) 11.0932 (9.90) ***

ROA

-0.2940 -0.2891 -0.2223 -0.2224 -1.1445 -1.1688 -1.0962 -1.1257 -1.0473 -1.0818 (-1.06) (-1.04) (-0.82) (-0.82) (-3.73) (-3.80) (-3.59) (-3.68) (-3.49) (-3.59) *** *** *** *** *** *** 0.0657 0.0664 0.0413 0.0412 0.0800 0.0818 -0.1741 -0.1754 -0.1872 -0.1885 -0.1684 -0.1698 PREFINANCE (0.54) (0.54) (0.33) (0.33) (0.66) (0.68) (-2.57) (-2.59) (-2.70) (-2.73) (-2.43) (-2.46) *** *** *** *** ** ** 0.8541 0.8538 0.2573 0.2618 0.8701 0.8702 0.2571 0.2605 0.8365 0.8359 0.2502 0.2539 STDIV (5.20) (5.20) (2.38) (2.43) (5.13) (5.13) (2.33) (2.37) (5.10) (5.10) (2.25) (2.28) *** *** ** ** *** *** ** ** *** *** ** ** -0.7192 -0.7177 -0.4964 -0.47914 -0.7394 -0.7395 -0.4938 -0.4772 -0.6244 -0.6183 -0.4784 -0.4609 LEV (-3.75) (-3.74) (-2.73) (-2.63) (-3.78) (-3.78) (-2.64) (-2.55) (-3.17) (-3.15) (-2.45) (-2.35) *** *** *** *** *** *** *** ** *** *** ** ** -0.4238 -0.4261 -0.3768 -0.3766 -0.3810 -0.3888 -0.6188 -0.6703 -0.5401 -0.5920 -0.5219 -0.5629 Constant (-1.26) (-1.29) (-1.45) (-1.46) (-1.27) (-1.27) (-2.07) (-2.23) (-1.75) (-1.91) (-1.67) (-1.79) * * * * ** ** YearDummy Control Control Control Control Control Control Control Control Control Control Control Control IndDummy Control Control Control Control Control Control Control Control Control Control Control Control N 3624 3624 2907 2907 3448 3448 2786 2786 3294 3294 2606 2606 Wald-Chi 881.60 883.51 639.11 639.10 830.92 831.51 608.40 608.47 778.18 779.84 599.27 600.93 Pseudo R2 0.3967 0.3967 0.2783 0.2793 0.3940 0.3940 0.2755 0.2763 0.3790 0.3790 0.2717 0.2722 In the parentheses are the White adjusted t statistics considering the heteroscedasticity; ***, **, and * denote statistical significance at the 0.01, 0.05, and 0.10 level, respectively. FCF -0.2101 (-0.78) -0.2120 (-0.79)

Table 10: Linear Regression on the Determinants of Cash Dividends Per Share on Systematically Change
Variables Model 02-04 0.4417 (15.95) *** -0.0152 (-1.42) -0.0159 (-1.37) -0.0153 (-1.43) 0.0515 (4.44) *** -0.0242 (-3.29) *** -0.0079 (-2.39) ** 0.0060 (1.53) -0.0142 (-0.96) -0.0004 (-0.27) 0.0812 0.0515 (4.44) *** -0.0243 (-3.30) ***1 -0.0079 (-2.39) ** 0.0061 (1.53) -0.0141 (-0.96) -0.0004 (-0.27) 0.0812 0.0528 (4.53) *** -0.0123 (-1.34) -0.0094 (-2.37) ** 0.0075 (1.71) * -0.0822 (-5.60) *** -0.0047 (-2.06) ** 0.1215 Model 02-04 0.4417 (15.94) *** Model 99-01 0.1862 (6.21) *** -0.0279 (-2.29) ** Model 99-01 0.1858 (6.21) *** Model 02-04 v>0.2 0.4345 (15.60) *** -0.0164 (-1.47) Model 02-04 v>0.2 0.4345 (15.59) *** Model 99-01 v>0.2 0.1672 (5.72) *** -0.0283 (-2.23) ** Model 99-01 v>0.2 0.1665 (5.71) *** Model 02-04 A-Share 0.4133 (14.36) *** -0.0132 (-1.20) Model 02-04 A-Share 0.4133 (14.35) *** Model 99-01 A-Share 0.1501 (4.92) *** -0.0293 (-2.39) ** Model 99-01 A-Share 0.1498 (4.91) ***

PREDIV

STATE CentralGov LocalGov

CV

-0.0170 (-1.30) -0.0263 (-2.16) ** 0.0534 (4.59) *** -0.0109 (-1.19) -0.0092 (-2.32) ** 0.0057 (1.26) -0.0807 (-5.51) *** -0.0047 (-2.07) ** 0.1212

-0.0179 (-1.48) -0.0165 (-1.49) 0.0576 (4.57) *** -0.0268 (-3.45) *** -0.0081 (-2.38) ** 0.0063 (1.58) -0.0155 (-0.98) 0.327 -0.00004 (-0.02) 0.0835 0.0577 (4.57) *** -0.0270 (-3.48) *** -0.0081 (-2.39) ** 0.0066 (1.61) -0.0153 (-0.97) 0.334 -0.00004 (-0.02) 0.0835 0.0613 ( 4.98) *** -0.0135 (-1.44) -0.0090 (-2.21) ** 0.0077 (1.69) * -0.0801 (-5.28) *** -0.0053 (-2.32) ** 0.1222

-0.0164 (-1.20) -0.0267 (-2.09) ** 0.0617 (5.03) *** -0.0117 (-1.24) -0.0087 (-2.15) ** 0.0056 (1.22) -0.0784 (-5.19) *** -0.0054 (-2.33) ** 0.1220

-0.0130 (-1.06) -0.0132 (-1.19) 0.0656 (5.28) *** -0.0278 (-3.53) *** -0.0074 (-2.14) ** 0.0047 (1.17) -0.0146 (-0.93) -0.0008 (-0.51) 0.0820 0.0656 (5.28) *** -0.0278 (-3.52) *** -0.0074 (-2.13) ** 0.0047 (1.13) -0.0146 (-0.93) -0.0008 (-0.51) 0.0820 0.0667 (5.30) *** -0.0137 (-1.42) -0.0105 (-2.70) *** 0.0093 (2.11) ** -0.0845 (-5.18) *** -0.0042 (-1.62) 0.1175

-0.0181 (-1.34) -0.0277 (-2.25) ** 0.0669 (5.33) *** -0.0120 (-1.24) -0.0102 (-2.64) *** 0.0074 (1.64) -0.0837 (-5.14) *** -0.0042 (-1.63) 0.1172

CHAIN

STATECHAIN

ARECNO

GROWTH EPS

FCFPS PREFINANCE STDIVPS

(9.52) *** 0.0048 (2.24) ** -0.0057 (-1.03) -0.0153 (-0.48)

(9.54) *** 0.0048 (2.26) ** -0.0057 (-1.03) -0.0152 (-0.47)

(10.83) *** 0.0026 (0.74) -0.0059 (-1.43) -0.1022 (-3.65) *** 0.0013 (0.15)

(10.83) *** 0.0023 (0.67) -0.0060 (-1.44) -0.1010 (-3.61) *** 0.0018 (0.20)

(9.32) *** 0.0043 (1.95) * -0.0079 (-1.36) -0.0144 (-0.44)

(9.32) *** 0.0043 (1.97) ** -0.0080 (-1.37) -0.0141 (-0.43)

(10.57) *** 0.0017 (0.50) -0.0069 (-1.62) -0.1027 (-3.59) *** -0.0005 (-0.06)

(10.58) *** 0.0015 (0.42) -0.0069 (-1.63) -0.1016 (-3.56) *** -1.50e-07 (-0.00)

(8.90) *** 0.0044 (1.92) * -0.0053 (-0.94) -0.0128 (-0.38)

(8.90) *** 0.0044 (1.93) * -0.0053 (-0.94) -0.0128 (-0.38)

(9.66) *** 0.0005 (0.14) -0.0052 (-1.21) -0.1147 (-4.22) *** 0.0033 (0.36)

(9.65) *** 0.0002 (0.07) -0.0052 (-1.22) -0.1134 (-4.17) *** 0.0041 (0.44)

-0.0049 -0.0049 -0.0087 -0.0086 -0.0061 -0.0061 (-1.07) (-1.06) (-1.75) (-1.74) (-1.67) (-1.67) * * * * 0.0314 0.0342 0.0409 0.0409 0.0313 0.0341 0.0448 0.0445 0.0339 0.0362 0.0412 0.0411 Constant (1.98) (2.17) (3.14) (3.16) (2.00) (2.19) (3.50) (3.50) (2.17) (2.33) (3.35) (3.35) ** ** *** *** ** ** *** *** ** ** *** *** YearDummy Control Control Control Control Control Control Control Control Control Control Control Control IndDummy Control Control Control Control Control Control Control Control Control Control Control Control N 3624 3624 2907 2907 3448 3448 2786 2786 3294 3294 2606 2606 F 52.73 50.80 26.05 25.63 49.16 47.37 24.22 23.88 47.04 45.34 23.13 22.64 R2 0.4363 0.4363 0.2926 0.2937 0.4349 0.4349 0.2877 0.2891 0.4193 0.4193 0.2712 0.2724 In the parentheses are the White adjusted t statistics considering the heteroscedasticity; ***, **, and * denote statistical significance at the 0.01, 0.05, and 0.10 level, respectively. LEV

Table 11: Linear Regression on the Determinants of Cash Dividend Payout Ratio on Systematically Change
Variables Model 02-04 0.3111 (10.41) *** -0.0689 (-1.53) Model 02-04 0.3113 (10.44) *** Model 99-01 0.1009 (5.07) *** -0.0346 (-0.72) Model 99-01 0.0996 (5.02) *** Model 02-04 v>0.2 0.3089 (10.10) *** -0.0602 (-1.28) Model 02-04 v>0.2 0.3090 (10.13) *** Model 99-01 v>0.2 0.0932 (4.73) *** -0.0310 (-0.61) Model 99-01 v>0.2 0.0918 (4.68) *** Model 02-04 A-Share 0.2926 (9.51) *** -0.0630 (-1.33) Model 02-04 A-Share 0.2929 (9.54) *** Model 99-01 A-Share 0.0768 (3.74) *** -0.0274 (-0.55) Model 99-01 A-Share 0.0765 (3.73) ***

PREPAYOUT STATE CentralGov LocalGov C

CV

0.2019 (4.14) *** -0.0528 (-1.63) -0.0362 (-2.68) *** 0.0295 (1.88) * -0.4565 (-6.80) *** -0.0068 (-1.12) 0.2878 (4.67)

CHAIN

STATECHAIN

ARECNO

GROWTH ROA

-0.0948 (-1.94) * -0.0720 (-1.59) 0.2023 (4.15) *** -0.0560 (-1.73) * -0.0366 (-2.71) *** 0.0336 (2.10) ** -0.4539 (-6.75) *** -0.0069 (-1.14) 0.2911 (4.68)

0.0247 (0.44) -0.0257 (-0.53) 0.1993 (4.13) *** -0.0758 (-1.92) * -0.0360 (-2.29) ** 0.0101 (0.55) -0.4822 (-7.66) *** -0.0217 (-2.32) ** 0.4564 (4.82)

0.1960 (4.07) *** -0.0837 (-2.13) ** -0.0371 (-2.36) ** 0.0203 (1.15) -0.4912 (-7.77) *** -0.0216 (-2.30) ** 0.4545 (4.76)

0.2083 (3.77) *** -0.0573 (-1.63) -0.0349 (-2.52) ** 0.0268 (1.66) * -0.4591 (-6.18) *** -0.0060 (-0.88) 0.2973 (4.40)

-0.0932 (-1.82) * -0.0640 (-1.35) 0.2093 (3.79) *** -0.0621 (-1.76) * -0.0355 (-2.56) ** 0.0321 (1.94) * -0.4549 (-6.12) *** -0.0061 (-0.89) 0.2994 (4.39)

0.0307 (0.52) -0.0223 (-0.44) 0.2049 (3.82) *** -0.0721 (-1.68) * -0.0337 (-2.06) ** 0.0097 (0.51) -0.4802 (-7.29) *** -0.0242 (-2.55) ** 0.4632 (4.56)

0.2028 (3.78) *** -0.0817 (-1.92) * -0.0350 (-2.14) ** 0.0202 (1.11) -0.4899 (-7.41) *** -0.0240 (-2.52) ** 0.4591 (4.49)

0.2375 (4.48) *** -0.0700 (-2.00) ** -0.0360 (-2.53) ** 0.0288 (1.74) * -0.4714 (-6.40) *** -0.0066 (-1.06) 0.2438 (3.69)

-0.0864 (-1.66) * -0.0659 (-1.39) 0.2384 (4.50) *** -0.0734 (-2.09) ** -0.0364 (-2.56) *** 0.0325 (1.91) * -0.4679 (-6.35) *** -0.0067 (-1.07) 0.2443 (3.68)

0.0218 (0.38) -0.0202 (-0.40) 0.2252 (4.38) *** -0.0807 (-1.88) * -0.0374 (-2.32) ** 0.0150 (0.79) -0.4707 (-7.10) *** -0.0243 (-2.26) ** 0.4578 (4.36)

0.2240 (4.36) *** -0.0886 (-2.09) ** -0.0385 (-2.39) ** 0.0234 (1.28) -0.4750 (-7.19) *** -0.0241 (-2.23) ** 0.4581 (4.32)

*** *** *** *** *** *** *** *** *** *** *** *** -0.0013 0.0025 -0.0226 -0.0344 -0.0142 -0.0091 -0.0256 -0.0377 0.0072 0.0107 -0.0265 -0.0364 FCF (-0.03) (0.05) (-0.29) (-0.44) (-0.28) (-0.18) (-0.32) (-0.47) (0.14) (0.21) (-0.32) (-0.44) 0.0234 0.0224 -0.0201 -0.0202 0.0199 0.0184 -0.0217 -0.0220 0.0210 0.0201 -0.0182 -0.0184 PREFINANCE (0.72) (0.69) (-1.15) (-1.15) (0.58) (0.54) (-1.19) (-1.21) (0.64) (0.61) (-1.00) (-1.01) -0.1156 -0.1168 -0.0749 -0.0758 -0.1112 -0.1122 -0.0727 -0.0740 -0.1081 -0.1093 -0.0714 -0.0727 STDIV (-7.93) (-8.00) (-4.25) (-4.30) (-7.65) (-7.69) (-4.20) (-4.28) (-7.60) (-7.65) (-4.28) (-4.35) *** *** *** *** *** *** *** *** *** *** *** *** -0.1206 -0.1206 -0.1544 -0.1509 -0.1519 -0.1536 -0.1637 -0.1597 -0.1446 -0.1462 -0.1555 -0.1516 LEV (-4.86) (-4.80) (-3.56) (-3.50) (-4.73) (-4.75) (-3.49) (-3.43) (-4.65) (-4.66) (-3.62) (-3.58) *** *** *** *** *** *** *** *** *** *** *** *** 0.3188 0.3219 0.3419 0.3278 0.3498 0.3555 0.3432 0.3271 0.3395 0.3437 0.3309 0.3174 Constant (5.93) (5.98) (5.80) (5.51) (6.13) (6.23) (5.64) (5.32) (5.92) (5.99) (5.41) (5.14) *** *** *** *** *** *** *** *** *** *** *** *** YearDummy Control Control Control Control Control Control Control Control Control Control Control Control IndDummy Control Control Control Control Control Control Control Control Control Control Control Control N 3624 3624 2907 2907 3448 3448 2786 2786 3294 3294 2606 2606 F 36.84 35.17 24.15 23.86 34.75 33.01 22.57 22.33 32.87 31.45 22.32 22.27 R2 0.2170 0.2174 0.1290 0.1312 0.2149 0.2156 0.1261 0.1285 0.2072 0.2075 0.1268 0.1283 In the parentheses are the White adjusted t statistics considering the heteroscedasticity; ***, **, and * denote statistical significance at the 0.01, 0.05, and 0.10 level, respectively.