Financial Flexibility, Financing Option and Catering Strategy of Chinese Listed Firms

Abstract

During the years 2006 and 2008, semi-mandatory regulations of paying dividends published by the SEC set minimum payout levels for those firms who would like to use equity financing. This institutional background makes the payout behavior of Chinese listed firms show different patterns from theoretical predictions. It also provides natural experiment setting to test the direct relationship between payout choices and financing behavior. This paper takes the regulations as the institutional background, treats the financing qualifications as the option for firms to choose, and then discusses the value of the options from the perspective of financial flexibility, further analyzes theoretically the catering strategy, and empirically tests it. Our analysis suggests that financial flexibility is the key factor in understanding dividend behavior of Chinese listed firms. In addition, when firms choose the payout behavior for their own benefits from the perspective of financial flexibility there will be market efficiency. The SEC should relax their role in directing firms’ behavior, in order to fasten the marketization process of Chinese capital market.