Stock Market Liberalization, Agency Shock, and Dividend Policy

This study examines changes in firms’ dividend payouts following an agency shock to managers and investors in the Chinese context. The conceptual differences proposed by Kalay (2014) suggest that an agency (information) shock predicts a decrease (increase) in dividend payments. We test this prediction by analyzing the dividend payment behaviors of eligible firms under the Shanghai-Hong Kong Connect (SHK Connect) around the Chinese capital market liberalization. The event serves as a proxy for a general improvement of the agency cost environment in the economy. Using a Difference-in-differences model under Propensity score matching methodology (PSM-DID), we find that both the dividend levels and the number of dividend-payers decline after the event, and firms are less (more) likely to increase (decrease) dividends. Such changes occur around the agency shock. The downward patterns occur in firms with no pre-event foreign shareholdings and are more pronounced in stocks with the most active foreign trading. We further show that the declining trend only appears in firms that are more subject to agency problems. Our results confirm the essential monitoring role of foreign investors in shaping firms’ dividend policies.