The Value Relevance and Information Content of Cash and Stock Dividends in China

Abstract

The Chinese stock markets provide a unique experimental setting in which to examine how cash and stock dividends convey value relevant information about future performance and future cash dividends. Utilising market valuation equations based on Ohlson (1995), as well as prediction models, and applying them to a large sample of Chinese firms from 2003-2011, we find the following. First, stock dividends are positively associated with firm value, and convey information about future cash dividends and future earnings in the absence of cash dividends. Second, when cash dividends are paid, it is these that convey information about future cash dividends. Third, the value relevance and information content of cash dividends is stronger following the split share reforms and the adoption of IFRS, while the value relevance of stock dividends weakens over the same time period. Our evidence suggests that, in China, where the information environment is not as well-developed as in Western stock exchanges, stock dividends play an important role where cash dividends are not informative and this may help to explain their prevalence.