Abstract
We examine the stock dividend puzzle in China during 1992-2008 by analysing the market reaction, who pays more or solely stock dividends compared to cash dividends and why. In general, stock dividends send a positive market signal which is stronger for larger stock dividends and simultaneous cash dividend declarations. Companies take advantage of this positive announcement reaction when they are cash poor, or have low profitability. In addition, when the overall market underperforms, cash dividends decrease while stock dividends increase significantly. Non-tradable shares are owned by two distinct groups who have different incentives and therefore are likely to prefer different dividend policies. Consistent with this, we find evidence that state-owned shareholders prefer cash dividends, while legal-person shareholders prefer stock dividends.
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