CC BY
23
СИСТЕМНЫЙ АНАЛИЗ И МЕЖДИСЦИПЛИНАРНЫЕ ПОДХОДЫ В ИССЛЕДОВАНИЯХ
Hu Junnan, Xu Xiaoyang
УДК 336.01/.02
DIVIDEND POLICY OF LISTED COMPANIES IN CHINA
Introduction.
The dividend policy is an integral part of the company's financial management, affecting the company's earnings distribution, investment decisions, financing decisions, stock price, etc. From 1990, Chinese stock market has taken great changes, such as the stock market scale continually expanding, companies increasingly maturing, investors becoming more rational and supervision growing standard. But compared with the securities markets of developed countries, Chinese securities market is still very immature. Irrational dividend distribution of listed companies is a serious obstacle to the development of Chinese securities market. Therefore, how to regulate the dividend policy of listed companies becomes currently a very important topic in China.
1. Problems of listed companies' dividend policy in China.
1.1. High non-distribution1percentages.
Before 1994, the listed companies that didn't distribute profit were few in China. However, from 1994 to 1999, the percentage of non-distribution companies increased as follows: 10.81%, 19.69%,
29.96%, 50.60%, 56.59% and 60.45%. In 2000, because the Chinese Securities Regulatory Commission took distributing cash dividends as a necessary condition for listed companies' refinancing, the non-distribution percentage dropped to 35.8% that remained high. Moreover, table 1 shows an upward trend in the non-distribution percentage between 2001 and 2005. This situation isn't very conducive to fostering investor confidence and regulating the operation of Chinese listed companies.
1.2. Prevalent sending shares2.
In China the listed companies have loved sending shares for a long time. From 1994 to 1996, the percentages of listed companies sending shares were: 21%, 23% and 34%. After 1997 the percentages of listed companies sending shares reduced. In 2001 the percentage reduced to the lowest point 1.05%. Table 2 shows between 2002 and 2005, the percentages of listed companies sending shares remained around 3%.
Sending shares proportionally increases the number of shares each shareholder owns. After sending shares, a shareholder's proportional
Table 1
Dividend policy of listed companies in China, 2001-2005.
Dividend policy 2001 2002 2003 2004 2005
Numb er Percen t Numb er Percen t Numb er Percen t Numb er Percen t Numb er Percen t
Non- 459 40.29 545 44.53 614 47.71 601 43.65 714 51.66
distribution % % % % %
Distribution 680 59.71 % 679 55.47 % 673 52.29 % 776 56.35 % 668 48.34 %
Total 1139 100% 1224 100% 1287 100% 1377 100% 1382 100%
1 Non-distribution isn't includes stock dividends and transferring from the "Capital contributed in excess of par value" account to the "Paid-in capital" account.
2 Sending shares includes stock dividends and transferring from the "Capital contributed in excess of par value" account to the "Paid-in capital" account.
Table 2
Number of listed companies sending shares in China, 1994-2005.
Year Number of listed companies sending shares Number of listed companies Percent
1994 61 297 21%
1995 73 321 23%
1996 192 570 34%
1997 133 732 18%
1998 116 815 14%
1999 60 922 7%
2000 17 1093 2%
2001 12 1139 1.05%
2002 38 1224 3.10%
2003 45 1287 3.49%
2004 27 1377 1.96%
2005 38 1382 2.75%
ownership in the firm and the stock market value of a firm remain unchanged. But because the total earnings remain the same, the increase in the number of shares results in the reduction in the earnings per share and the market price per share of stock. That is to say, after sending shares a stock is in a lower, more popular trading range that may attract more buyers. Therefore, many listed companies send shares to attract more investors to purchase their stocks. The increase in investors may raise the market price per share of stock. So the listed companies may achieve the goal of gathering the wealth. Under these conditions, the market price per share of stock is easy to be distorted, resulting in the increase in the stock market speculation. It is disadvantageous to attract the long-term investors.
1.3. Low dividend payout ratios3.
What level the dividend payout ratio should be determined, the firms need to consider many factors: profession, scale, growing speed and so on. The dividend payout ratio of U.S. corporations is about 50%. The dividend payout ratios of and the Japanese corporations are relatively low (45% for the Germanic corporations and 35% for the Japanese corporations). But in China the important characteristic of listed companies' dividend policy is the low dividend payout ratio (about 30%) and the insufficient payment of cash dividends. Table 3 shows that during the period of
1994 to 1999, the listed companies paying cash dividends declined in China. Especially, in 1996 the percentage of listed companies paying cash dividends fell to the lowest percentage (17.89%). Afterwards, because in 2000 the Chinese Securities Regulatory Commission required that the payment of cash dividends was a necessary condition for the listed company refinancing, the percentage of listed companies paying cash dividends increased sharply to 50.78%, even in 2001 reaching the highest percentage (53.64%). Since 2001 the number of listed companies paying cash dividends has fallen. Only in 2004 as a result of the Chinese Securities Regulatory Commission definitely linking the refinancing of listed companies with cash dividends, a little upsurge of paying cash dividends arose (about 44.22%). Although the number of listed companies paying cash dividends increases to a certain degree, the companies paying symbolic cash dividends also are increasing. For example, in the two high percentage years: in 2001, among 611 listed companies paying cash dividends, the listed companies whose dividend per share was less than Jn0.05 accounted for 33% of listed companies, there were 120 listed companies whose dividend payout ratio was below 25%; in 2004, there were 23 listed companies whose dividend per share was less than Jn0.1 and 93 listed companies whose dividend per share was less than Jn0.2, these listed companies paid only
' The dividend payout ratio is annual cash dividends divided by annual earnings.
Table 3
Number of listed companies paying cash dividends in China, 1994 - 2005.
Year Number of listed companies paying cash dividends Number of companies listed „ Percent
1994 134 297 45.11%
1995 100 321 31.15%
1996 102 570 17.89%
1997 170 732 23.22%
1998 206 815 25.28%
1999 286 922 31%
2000 555 1093 50.78%
2001 611 1139 53.64%
2002 537 1224 43.87%
2003 466 1287 36.21%
2004 609 1377 44.22%
2005 510 1382 36.91%
less than 10% to 20% of earnings to the shareholders.
Moreover in recent years while paying cash dividends the listed companies implemented financial plans, such as rights offerings, issuing additional stock, sending shares and so on. This indicates that the dividend policy of listed companies is one method of equity financing in China. For one thing, some companies whose net assets is higher, reduce the net assets by paying cash dividends, thereby increasing net income to net assets ratio to meet the relative requirements of the Chinese Securities Regulatory Commission. For another, some major shareholders gain and take back their investment quickly from paying high cash dividends. Because in China some shares hold by major shareholders can't be negotiable, while equity financing these shareholders may abandon subscribing for additional shares without worrying about their right removed. On the contrary they can gain from the net asset's appreciation resulted from outstanding stockholders subscribing for shares at a premium. Medium-small shareholders not only don't receive the ideal reward, but also are forced to participate in the process of refinancing and bear the loss of stock price fallen. So the whole stock market is in the doldrums.
1.4. Variable dividend policy.
In China, listed companies distribute dividends with a great degree of randomness. The dividends payout ratio and the form of dividend
distribution aren't consistent. The dividend payout ratio is sometimes high and sometimes low. The forms of dividend distribution sometimes pay cash dividends and sometimes send shares. From 1996 to 2000, the number of the listed companies that continued paying dividends for 4 years accounted for 4.5% of the total listed companies. From 1997 to 2000, the number of the listed companies that continued paying dividends for 3 years accounted for 7.44% of the total listed companies. The number of the listed companies that continue paying dividends for 4 years increased during the period 2002 — 2005 (Table 4), but it amounted to only 29.21% of the total listed companies. Moreover, the annual dividends that the listed companies that continue paying cash dividends distribute are unstable (some years high and some years low). The variable dividend policies of listed companies send investors the variable operating information, inducing investors to worry about the business risk of listed companies. Consequently the market price per share of listed companies' stock is influenced greatly by the variable dividend policy.
2. Analysis of reasons.
2.1. Macroscopic factors.
2.1.1. Securities capital market' inefficiency.
The Chinese securities market starts after the securities market of western developed country. It belongs to the weak form of capital market efficiency, not yet achieving semi-strong form of capital market efficiency. There are many imperfections in some aspects, such as
Table 4
Number of listed companies continuously paying dividends in China, 2002 - 2005.
Consecutive Paying dividends for 1 Paying dividends for 2 Paying dividends for 3 Paying dividends No for distribution Total
years year year year 4 year for 4 years
Number 178 158 188 364 358 1246a
Percent 14.29% 12.68% 15.09% 29.21% 28.73% 100%
'Selected Shanghai and Shenzhen Stock Exchange-listed stocks.
non-negotiable stock, stockholder's equity structure, governmental intervention, information disclosure and so on. The efficiency of the Chinese securities market is low. The stock market is often treated as the financial place of listed company, instead of the place of realizing resource allocation optimization. These are disadvantageous to guiding listed companies to formulate the rational dividend policy.
Firstly, the reformation of stockholders' equity division is hard. By the end of 2004, the total shares of listed companies had been 714.9 billions shares in Chinese stock markets. The 454.3 billions shares that accounted for 64% of the total listed companies' shares couldn't be negotiable. Because the percentage of non-negotiable shares is very high, the shareholders who hold non-negotiable shares can take advantage of their control of the corporate governance to manipulate the payment of listed companies' cash dividends. So the payment of cash dividends becomes a strategy of these major shareholders obtaining cash. However compared with these non-negotiable shareholders, negotiable shareholders only obtain negligible profits. In order to enable Chinese listed companies to have a long-term healthy development and protect the long-term interests of investors, the State Council put forward the reformation of stockholders' equity division to change the unreasonable stockholders' equity structure of Chinese listed companies in 2005. By August 28, 2006, in Shanghai and Shenzhen stock markets, the listed companies that carried out the reformation of stockholders' equity division had amounted to 1145, accounting for 85.2% of the all listed companies that should carry out the reformation of stockholders' equity division. But the reformation of stockholders' equity division is not easy. Chinese stock markets inevitably encounter some problems, such as: the reformation of stockholders' equity division is still in the policy aspect of the Securities
Regulatory Commission, the State Asset Management Commission and the Ministry of Finance, without formally entering the legislative track; the securities market lacks the pricing principles; the volatility of listed companies' performance influences the stability of the securities market; the diversity of investors impacts on the securities market; the Government is eager for quick success and instant benefit, neglecting the quality of the reformation of stockholders' equity division; and so on.
Secondly, the Government intervenes. China is a country switching the planned economy system to the market economy system. The stock market is in the condition that demand exceeds supply. The Government excessive intervention affects the dividend policy of listed companies to a certain degree, distorting the information of dividend policy conveying. As a consequence, the trend of stock markets is divorced from the national economy.
Finally, the information disclosure isn't standard. In China the dividend policy of most listed companies aren't consistent. When the profitability of a listed company doesn't change, the listed company frequently changes the form and quantity of dividend payment without disclosing any reason. This inevitably misleads the investors and reduces the efficiency of market resources allocation.
2.1.2. Economic environment influence.
State macroscopic economic environment has a great influence on the dividend policy of listed companies. During the initial period of Chinese stock market developing, Chinese macroscopic economy grows speedily due to the reform and open policy. Chinese listed companies' operation also obtains the high-speed growing power, especially real estate, electrical appliances, computer and finance developing rapidly. These industrial listed companies rapidly expand their capital stock in a short time by sending shares and rights offerings. However,
when China enters the economic adjustment time, for adapting economic adjustment, many listed companies either don't distribute dividends or carry out the dividend policy of not expanding the capital stock.
2.1.3. Laws and regulations imperfections.
In order to protect investors' interests, Chinese "Company Law" and "Negotiable securities Law" all lay down some restrictions on the dividend distribution of listed companies, such as capital impairment rule, insolvency rule, undue retention of earning rule. But because there aren't the detailed rules of paying dividends, listed companies can decide the form and quantity of dividend distribution at will. That is to say, it isn't illegal that the board of directors decides not to pay dividends. Since the dividend distribution right of medium-small shareholders can't be upheld by law, the investors' enthusiasm and the development of listed companies are influenced greatly. Moreover, so far the Government hasn't legislated for the reformation of stockholders' equity division. The reformation of stockholders' equity division is upheld only by some policies issued by the Securities Regulatory Commission, the State Asset Management Commission and the Ministry of Finance. Thus, the supervision methods of Chinese securities regulatory department lag, often being administrative means instead of laws.
2.2 Microscopic factors.
2.2.1. Imperfect corporate governance structure.
The imperfect corporate governance structure is an important factor of listed companies' irrational dividend distribution. First of all, because the reformation of stockholders' equity division is still in progress, the optimization of listed companies stockholders' equity structure will be faced with many problems that urgently need solution. Second, independent directors are difficult to play their role. Because the manager level and board of directors appoint the independent director are virtually controlled by major shareholders. Furthermore the percentage of independent directors in the corporate board of directors is very small, so they are difficult to impact on the decision of the corporate board of directors. In addition, the link between the independent directors' rewards and the corporate operating performance shakes the independence of independent directors. Third, listed companies lack the effective mechanisms
for selecting managers. In most state-owned listed companies, managers are still appointed by the government. The government administration doesn't completely separate from enterprise management. Fourth, there are some obstacles to the staff participating in corporate governance. For example, although the "Company Law" reflects the principles of staff participating in corporate governance to a certain extent, most of provisions are difficult to operate and limit the trade union to participate in corporate governance.
In China, listed companies improve their governance mainly under the pressure of the regulatory department. Therefore the improvement of corporate governance is in form more than in substance. According to " The evaluation report of Chinese top 100 listed companies' corporate governance in 2006" released by the corporate governance center under the Chinese Academy of Social Sciences, we can see that the management level of Chinese listed companies has generally improved, but the degree of improvement is very small. Even the evaluation report shows there are some decrease in some aspects, such as the rights of shareholder, the responsibilities of the board of directors and the role of stakeholders.
2.2.2 Corporate operating condition.
The operating condition of Chinese listed companies has great influence on their dividend policy. To begin with, the majority of Chinese listed companies are in growth stage. Owing to great demand for funds, these listed companies don't pay dividends or pay a few dividends. So they may retain a great amount of earnings to help finance their growth, reducing the financing costs and external financing needs. Next, because many Chinese listed companies invest on speculative purpose, without the perspective of the overall enterprise. So after investment the listed companies can't control funds effectively. A large number of funds are occupied without economic benefit. The unstable income and high risk from investment result in the variable dividends policy of listed companies. Third, in China the number of loss-making listed companies is increasing year by year. The percentage of loss-making listed companies also shows an upward trend. Although some listed companies don't suffer losses, their profits don't form cash flow but showing accounts receivable. These loss-making or low-return listed companies
ИРКУТСКИЙ ГОСУДАРСТВЕННЫЙ УНИВЕРСИТЕТ ПУТЕЙ СООБЩЕНИЯ
are unable to pay dividends. In addition, as a result of the poor liquidity and continuity of profit, many listed companies lose the basis of consistent dividend policy in China.
2.2.3 Shareholders' preference.
In Chinese stock market, many medium-small shareholders buy the shares as a speculation instead of investment. They concern only about the speculative gains from stock price differences, instead of the investment profits from the dividend distribution. Therefore, the medium-small shareholders prefer sending shares and stock dividends. Meanwhile, the major shareholders of listed companies have the control of making decisions. In order to avoid taxes and the control dispersion, the major shareholders prefer retaining more earnings to paying more cash dividends. Whereas the high cash dividends often are taken as the means of refinancing.
3. Measures to regulate listed companies' dividend policy in China.
3.1. Regulating the securities market.
In order to raise the efficiency of the securities capital market and guide the listed companies to formulate the rational dividend policy, Chinese government should take following measures to regulate the securities market.
Firstly, the reformation of stockholders' equity division should proceed in an orderly way and step by step. To begin with, the process of revising and perfecting the regulations relative to the whole stock's negotiation should quicken. Such as: the implementation rules of the whole stock's negotiation, the rules of share repurchase, the regulations of the state-owned shares' negotiation, etc. National People's Congress should legislate for the reformation of stockholders' equity division as soon as possible. In the second place, a reasonable price for the whole stock's negotiation should be determined, in order to balance the interests of every aspect and steady securities market. The key to the reform's success is to prevent interests from being transported by insider dealing and avoid the loss of state assets. In addition, several rounds of consultation between negotiable shareholders and non-negotiable shareholders about specific reform programs should be allowed, to protect the interests of negotiable shareholders and ensure the smooth implementation of the reformation of stockholders' equity division.
Next, the Government should lessen intervention and strengthen supervision. For one thing, the guiding ideology of the securities market must be adjusted, from the direct administrative intervention to the indirect intervention by economic and legal means. The Government must try to do everything in the internal laws of economic activities. For another, the state regulatory department should not only perfect the operation rules of securities market, but also strictly supervise the behavior of listed companies. When a listed company ignores the rules and disrupts the market order, the state regulatory department must promptly punish it.
Finally, the information disclosure of listed companies' dividend distribution should be regulated. If a listed company doesn't distribute dividends, it should disclose the reasons for non-distribution in their annual reports in detail. When a listed company applying for rights offerings declares its plan of rights offerings, it should announce the details of project's feasibility research report and the use of previous rights offerings' funds. Moreover a listed company that adopt sending shares, should disclose the use of distributable profits transferred to the capital stock. So the dividend policy of listed companies will be regulated by law and supervised by society.
3.2. Perfecting the dividend distribution law.
The Government should perfect legislation and strengthen enforcing the law to crack down on insider dealing and illegal operation, regulating the conduct of market participants according to the law. First, the protection of the right to request dividend distribution should be strengthened. The right to request dividend distribution is the right that shareholders can request companies to distribute dividends to them according to their proportional ownership. The Chinese government should learn from the foreign dividend distribution law. For instance, under certain conditions, the court can interfere in the dividend distribution of listed companies to let medium-small shareholders assert their dividend distribution right according to laws. Next, due to particular ownership structure of Chinese listed companies, the protection of medium-small shareholders' interests must be emphasized. As an example, the Government should lay down restrictive regulations on unreasonable and excessive dividend distribution of listed companies, stipulating definitely the
conditions of listed companies' non-distribution. Moreover, the Company Law should also increase the detailed and workable rules of dividend distribution, such as the procedure of dividend distribution, the profits level of paying cash dividends, the conditions of paying stock dividends, the dividend payout ratios at different profit level, and so on. In short, in order to protect the interests of medium-small investors and guide the listed companies to realize the dividend policy' rationalization, the Government should regulate the dividend distribution of listed companies by legislation.
3.3 Maintaining the consistency of dividend policy.
The consistent dividend policy not only helps investors expect the future earnings, but also avoids major shareholders damaging the interests of medium-small shareholders by dividend distribution. Therefore, on the one hand, when listed companies determine dividend policy, they should take into account the operating condition of earlier and later period. No matter what kind of dividend policy a listed company determines, it should maintain the policy for a long period, so as to strengthen the investors' confidence. On the other hand, the supervision departments should regulate the consistency of listed companies' dividend policy through some non-administrative means, such as requiring listed companies to pre-determine the target of dividend payout ratio, creating the dividend credit mechanism of listed companies, and so on. These means can guide listed companies to work out a workable dividend policy according to their actual situation and carry out this policy in a certain period.
3.4. Raising the enthusiasm of paying cash dividends.
For many years, in order to raise the enthusiasm of listed companies paying cash dividends, Chinese Securities Regulatory Commission has formulated some relative policies that play a certain role in impelling listed companies to paying cash dividends. For example: " a number of regulations on strengthening the protection of the public shareholders' interests" issued in 2004, definitely links the financing qualifications with paying cash dividends; "the management measures of listed companies issuing securities (draft)" issued in April 2006, requires that a listed company which publicly issues securities distributes the
last 3-year-cumulative profits not less than 20% of the last 3-year-average distributable profits. In addition, Chinese Securities Regulatory Commission also should definitely stipulate the minimum dividend payout ratio, requiring a listed company to pay out a certain percentage (for instance 40%) of earnings to shareholders in cash before refinancing, so as to keep the financing order of securities market.
3.5 Improving the corporate governance structure.
In order to improve the corporate governance structure, specific measures are as follows:
Firstly, the Government should continue to advance the reformation of stockholders' equity division and promptly improve the necessary stipulations and policies, so as to conform to the market condition of the whole stock's negotiation and create the conditions for market every aspect positively participating in the corporate governance structure.
Secondly, the independent directors system must be perfected, such as: solving the independent director's nomination, inspiration and supervision questions, definitely stipulating the specialized qualifications of a independent director, and ensuring the independent director fulfilling corresponding function by laws and regulations. Of course, now Chinese government also is conscious of these problems and tries to perfect the independent directors system. For example, New "Company Law" issued in 2006, explicitly stipulates that the independent director should be nominated by the negotiable shareholders together with Securities Regulatory Commission (not by the major stockholder at will), and the listed company should form the convention that the independent director hire auditors periodically.
Thirdly, the market mechanism of manager resources disposition should be established. That is to say, taking the market as the foundation, and taking manager's talent and synthetic quality as the criterion, the corporate board of directors legally, publicly, transparently selects the manager according to the corporate actual demand.
Fourthly, the status and function of the shareholder in the corporate governance structure should be enhanced. The Government should safeguard the shareholder right through every method and channel, such as: changing the assessing rules of the state-owned capital,
ИРКУТСКИЙ ГОСУДАРСТВЕННЫЙ УНИВЕРСИТЕТ ПУТЕЙ СООБЩЕНИЯ
protecting the owners' rights of the private company, improving the legal aid system of the medium-small shareholder, perfecting the relative lawsuit system, and so on. In March 2006, Chinese Securities Regulatory Commission promoted "Listed Companies Direction" (revised edition) and "Shareholders' Meeting Rules of Listed Companies ", which play a certain role in enhancing the status and the function of the shareholder in the corporate governance structure.
Finally, the mechanism of the staff participating in the corporate governance structure should be established. The law should define the right of the staff participating in the corporate governance structure and the percentage of the staff in the board of directors and the supervisor office. The listed companies can also learn from the foreign corporate governance experience. For example, in order to make staff have all kinds of experience and ability, listed companies may carry out non-professional experience road and have the various departments staff rotate work periodically. Through this method the staff will have the whole management idea. Namely, the staff can communicate the vertical department management and the horizontal quality, cost, product management, to achieve the purpose of the total quality management.
Conclusions.
This paper has counts the dividend distribution data (2001-2005) of all listed companies (over 1300) in Chinese stock market, according to statistical yearbook and listed companies' handbook. Combining other material's statistical data (1994-2000), this paper adopts the trend analysis method to analyze the
status quo and consequence of dividend policies in China. Furthermore, from macroscopic and microscopic angles this paper analyzes reasons, including: securities capital market' inefficiency, economic environment influence, laws and regulations imperfections, imperfect corporate governance structure, corporate operating condition, shareholders' preference. In concluding, in order to regulate the dividend policy of listed companies in China and raise the efficiency of the Chinese securities capital market, this paper proposes specific measures as follows: regulating the securities market, perfecting the dividend distribution law, maintaining the consistency of dividend policy, raising the enthusiasm of paying cash dividends, improving the corporate governance structure. These measures can strengthen the investors' confidence in Chinese securities market and help Chinese securities market develop healthily and orderly.
REFERENCES
1. The State Statistical Bureau of People's Republic of China. China Statistical Yearbook in 2005, China Statistics Press, 2006.
2. Chen Naijin. Fast facts manual of Listed companies in 2005. Xinhua Publishing House, May, 2005
3. Shao Zhenglin and Lin Yungang. Research on Dividend Policy of Listed companies in China. Market Weekly, March, 2004, 45.
4. Li Changqing. Theoretical and empirical research on Dividend policy. Chinese People's University Press, 2001.
5. SHLeifer Vishny A Survey of Corporate Governance Journal of Finance - 1997(52) P.737-783
