Economic policy uncertainty and dividend sustainability: new insight from emerging equity market of China

Bushra Sarwar,Xiao Ming,Muhammad Husnain

doi:10.1080/1331677x.2019.1708769

Abstract

We examine the influence of Economic Policy Uncertainty (E.P.U.) on dividend sustainability – dividend termination and dividend initiation decision. Using a sample of 1,375 firms over the time span 2000–2015, our main result reveals that during high E.P.U. past dividend payers are more likely to terminate and past non-payers are less likely to initiate dividends. However, firms that rely more on internal finance (I.F.), generate high return on invested capital (R.O.I.C.) and state-owned enterprises (S.O.E.s) are less exposed to E.P.U. Therefore, negative (positive) effect of E.P.U. on firms’ dividend initiation (termination) decision is mitigated by considering firms’ heterogeneous characteristics. Results also show that firms having high asset growth, maturity, profitability, cash holdings and high firm value are more likely to initiate and less likely to terminate dividend during period of high E.P.U. In addition, effects of E.P.U. on dividend sustainability is higher for firms functioning in high marketised areas relative to low marketised groups. These findings are robust under different robustness check. Finding confirms that transparent and stable implementation of economic policies can improve sustainability of firm’s dividend policy.

Highlights

The impact of economic policies on commercial activities has attracted the interest of numerous research studies. Baker, Bloom, and Davis (2016) documented in their recent studies that uncertainty caused by fiscal, monetary, regulatory and trade activities can provoke a significant association between real economy and financial markets
Existing literature examined the link between uncertainty (see e.g., market uncertainty (Walkup, 2016), cash flow uncertainty (Chay & Suh, 2009), political uncertainty (Huang, Wu, Yu, & Zhang, 2015) and dividend policy
Our findings confirm that cost of equity and perceived uncertainty of market participants increases during a period of high E.P.U., which identify an important channel that affect dividend sustainability

Summary

Introduction

The impact of economic policies on commercial activities has attracted the interest of numerous research studies. Baker, Bloom, and Davis (2016) documented in their recent studies that uncertainty caused by fiscal, monetary, regulatory and trade activities can provoke a significant association between real economy and financial markets. By taking data for 1,372 Chinese listed firms from 2000–2015, we first investigates whether E.P.U. causes an increase in cost of external equity measured required rate of return by investors, and perceived uncertainty of market participants measured as analyst forecast dispersion (A.F.D.). Our findings confirm that cost of equity and perceived uncertainty of market participants increases during a period of high E.P.U., which identify an important channel that affect dividend sustainability. Study contributes in existing literature by analysing the potential role of firm’s heterogeneous characteristics towards shaping the dt/di decision during E.P.U. Thirdly, we employ Chinese firms’ data because it is still considered as transition economy, relocating from centrally planned to market based economy.

Theoretical background and hypothesis development

Data and empirical modelling

Measurement of variables

Findings

Conclusion