Corporate equity refinancing and cash dividend in China: Based on the perspective of moral hazard

Abstract

There are two main ways for listed companies to realize fund allocation, equity refinancing and cash-dividend paying. The former is the source of equity fund; the latter is the use of equity capital and the returns to investors. In recent years, China Securities Regulatory Commission has issued a series of policies, in order to improve the cash dividend payout ratio before equity refinancing. In this background, there are more and more companies that refinance and pay cash dividend in the same year. This paper analyzes the relativity of equity financing and cash-dividend paying. This paper takes A-share stocks from 2007 to 2012 which have two events in Chinese securities market for a sample, and verifies the hypothesis that large shareholders' moral hazard does exist, from three aspects including announcement effect, financial performance and tunneling. The conclusions are as follows: The constraints of cash dividend paying has different effect on market reaction of different ways of equity refinancing; the samples with different sequences of cash dividend paying and equity refinancing have different equity financing announcement effect; different sequences of two events lead to different cash dividend paying announcement effect; by building performance rating model using financial indicators, I find that issue-dividend sample sores lower; the issue-dividend sample has higher discount rate and cash dividend payout ratio, thus tunneling directly to controlling shareholders.