Multiple Large Shareholders and Joint Expropriation with Dividend Payments

Abstract

To find the impact of multiple large shareholders on dividend payments, this chapter examines the association between cash dividends and the shareholders balancing mechanism (SBM) using the exogeneity and endogeneity assumptions of corporate ownership structure. This chapter identifies, in the case of China, whether paying cash dividends is a means of protection or the expropriation of minority shareholders’ interests. With 4,810 observations from companies listed on the Shanghai Stock Exchange over the period 2004–2008, the authors find significant negative associations between cash dividend payments and the SBM of non-controlling large shareholders under the exogeneity assumption, and the SBM of tradable shareholders under the endogeneity assumption. The findings suggest that cash dividends are used as a manner of tunneling by the controlling shareholder. This chapter also shows that the SBM of non-controlling shareholders has a significant positive effect on cash dividends, especially for companies paying high and abnormal dividends. The results imply that in China’s capital market, cash dividend payments are not only expropriations of minority shareholders’ interests by the controlling shareholder, but also by the coalition of controlling and non-controlling large shareholders. The findings confirm the tunneling and joint expropriation incentive of corporate dividend policy, and suggest that the presence of multiple large shareholders doesn’t always alleviate firm's agency costs and protect the benefits of minority shareholders.