Abstract
China Journal of aCC ounting StudieS , 2017 Vol. 5, no . 1, 28–49 http://dx.doi.org/10.1080/21697213.2017.1292717 Private placement and abnormal corporate payouts: evidence from large stock dividends* a b a Chenyu Cui , Yunsen Chen and Dengjin Zheng a b School of economics and Management, t singhua university, China; School of a ccountancy, Central university of f inance and economics, China ABSTRACT KEYWORDS Dividends should be used as the way firms reward their investors, Private placement; large stock dividends; dividend but in the Chinese stock market, large stock dividends have been policy; wealth transferring criticised for several years. In this paper, through a case study and large-sample empirical tests, we find that large stock dividends are used to cater to investors participating in a firm’s private placement. Further empirical tests document that during the unlocking periods of privately issued new shares, firms are more likely to pay large stock dividends, especially when outside private placement investors are able to sell their shares. Additional tests reveal that private placement investors do make stock sales after receiving large stock dividends. Furthermore, firms undertaking large stock dividends after private placement have more frequent connected-party transactions, are more tunnelled by other receivables and have more aggressive earnings management and lower investment efficiencies, implying that the governance role of private placement is largely attenuated because of large stock dividends. Large stock dividends after private placement are also shown to be opportunistic behaviour and irrelevant to future performance in our study. Overall, the large stock dividends result in wealth transferring between insiders and ordinary investors, and further reduce the efficiency of resource allocation in the Chinese capital market. From the results we insist that regulators should encourage cash dividends and keep a close eye on potential abuse through large stock dividends. 1. Introduction Large stock dividends transferred from retained earnings and capital surplus into equity capital have been a popular topic (Han, Lv, & Li, 2012; He & Chen, 2003; Li, Yu, Lu, & Xu, 2014; Xiao & Yu, 2012) in the Chinese A-share stock market. A firm’s stock price often rises CONTACT Yunsen Chen yschen@cufe.edu.cn *Paper accepted by Cong Wang. in rigorous terms, transferring capital surplus into owner’s capital is not paying dividends. it is referred to as a ‘stock dividend’, or in some countries it is called a ‘capitalisation issue’. Sometimes the term ‘bonus issue’ is used but this is misleading as there is no actual bonus in the accounting transfer itself. however, in China, it is a common practice for firms to disclose such issues in a dividend proposal. investors have long since become accustomed to this ‘classification’. as such, we follow that tradition throughout the rest of our paper. © 2017 a ccounting Society of China CHINA JOURNAL OF ACCOUNTING STUDIES 29 significantly immediately following the firm’s announcement of large stock dividends. Based on a media report, in the first half of the year 2014, 174 listed firms announced that they would pay large stock dividends, and some of them became attractive ‘star stocks’ after that. For instance, Yingkou Port (600317) increased during that period by 10% every day for five consecutive trading days after disclosing ‘2 yuan and 20 new shares from capital surplus per 10 existing shares’. In China, payout policies that enlarge share quantities by more than 50%, whether through retained earnings or capital surplus, are often called large stock dividends. Unsophisticated investors seem to consider large stock dividends as a ‘good illusion’, which indicates that firms are so generous as to ‘buy one and give one’ (Baker, Greenwood, & Wurgler, 2009; Zheng & Sun, 2013). In truth, large stock dividends are only an accounting adjustment involving redistributions in different owners’ equity accounts; they have no real meaning. However, in the Chinese A-share stock market, ordinary investors can be easily misled by such apparent ‘generosity’ and may be extremely irrational about it. Therefore, many listed firms tend to use such irrationality to manage stock price (Han et al., 2012; Li et al., 2014; Xiao & Yu, 2012). Although there is some anecdotal evidence in the financial press in China that indicates some abuse of large stock dividends in China, it has not drawn enough attention in academic research, and is still an anomaly unsolved by classical financial theory. As far as we know, little relevant research has examined a firm’s incentive to pay large stock dividends. Another remarkable issue in China is that severe interest-related conflicts are encountered during private placement (Zhang, 2010; Zhao, Yu, Xia, & Wang, 2011; Zhu, He, & Chen, 2008). Investors, especially those investing significant amounts into private equity offerings, defi- nitely require high returns (Silber, 1991). With their strong bargaining power, they are able to influence investees to cater to their needs (Barclay, Holderness, & Sheehan, 2007; Silber, 1991; Wruck, 1989). Under the motivation of collusion between investors and firms, it remains undetermined whether large stock dividends would be intentionally used for the sake of those investors. Therefore, this paper combines private placement and dividend policies together to establish a new viewpoint on large stock dividends. Using a case study of Company A (is an A-share listed firm in China), and large sample empirical tests, this paper analyses the interest-transferring problem via large stock dividends after private placement. We find that, first, the large stock dividends issued by Company A were not a signal of its future performance, but a tool used to transfer wealth. Second, empirical evidence shows that firms are more likely to pay large stock dividends during the unlocking period of privately issued new shares. After distinguishing the private placement investors into controlling shareholder (including its connected parties) and outside investors, we find that the tendency to take large stock dividends is more pronounced during the outsiders’ unlocking period, which means that large stock dividends are mainly designed for them rather than the controlling shareholder. Third, additional tests shows that outside investors do make stock sales to take advantage of large stock dividends, and firms f or more detailed information, please see: http://finance.sina.com.cn/stock/s/20140609/062219350418.shtml . Based on Chinese tax law and related regulations, stock dividends transferred from retained earnings shall be taxed on par values. however, shareholders sometimes endure tax burdens when they are paid by large stock dividends, and the market usually responds positively. t he following url provides an example of media reporting of a scandal relating to a Chinese investment company: http://m. nbd.com.cn/articles/2015-11-02/958056.htm. if you are interested in this case and want to investigate it please contact us privately. 30 C. CUI ET AL. undertaking large stock dividends suffer more from connected-party transactions and tun- nelling by other receivables, conduct more aggressive earnings management and have less efficient investment after private placement. Furthermore, our evidence indicates that the large stock dividends paid during such periods are not supported by a firm’s fundamentals. Finally, we also reveal that the higher the divergence between controllers’ voting and cash flow rights, or when institutional investors are also involved, the more likely that listed firms are going to pay large stock dividends after a private placement. This paper contributes to the literature in the following ways. First, it documents that large stock dividends comprise a method of price manipulation to gain more profits for private placement investors, which is different from the traditional view of the classical dividend theory. It also explains a firm’s motivation about large stock dividends based on the unique institutional background of China and extends the literature on dividend policy, particularly in relation to stock dividends and splits. Furthermore, additional studies indicate that large stock dividends in an irrational market not only transfer wealth among investors unequally (Han et al., 2012; Li et al., 2014; Xiao & Yu, 2012), but also impair the efficiency of resource allocation in the stock market. We conclude from our findings that large stock dividends destroy the governance rule of private placement and allow firms to indulge in opportunistic behaviour. Second, previous studies either focus merely on the ex ante conflicts of interest in private placement (Silber, 1991; Wruck, 1989; Wu et al., 2013; Zhang, 2010; Zhu et al., 2008) or examine only the expropriation and tunnelling behaviours committed by the controlling shareholder in the private placement (Zhao et al., 2011; Zhu et al., 2008). They ignore the important influence of large stock dividends. Third, our paper helps investors to form a rational attitude towards large stock dividends, and echoes the call for cash dividends advocated by the new security law. We also suggest regulators pay more attention to firms’ opportunistic payout behaviour. The rest of this paper is organised as follows. Section 2 presents a literature review. Section 3 provides a brief introduction to the related institutional background in China. We also develop our hypotheses in this section. Section 4 presents the case study of Company A. Sections 5 and 6 include the research design and empirical results. Section 7 concludes. 2. Literature review 2.1. Research on stock splits and stock dividends Classical financial theory considers stock splits and large stock dividends (also termed a capitalisation issue) as nothing more than means of increasing the number of shares; hence, these should have no effect on firm value and are at most ‘cosmetic’ (Ikenberry, Rankine, & Stice, 1996; Rankine & Stice, 1997). However, many of the empirical studies conducted in this field find abnormal returns after stock splits and stock dividends (Desai & Jain, 1997; Grinblatt, Masulis, & Titman, 1984; Han et al., 2012; Ikenberry and Ramnath, 2002). Two gen- erally accepted hypotheses about stock splits and stock dividends in the mainstream liter- ature are the ‘liquidity’ and ‘signalling’ hypotheses. The liquidity hypothesis suggests that firms increase the share numbers to realign stock prices into the favourable trading range (Lakonishok & Lev, 1987). This is considered to be a trade-off between the desire of wealthy investors and institutions who will minimise brokerage costs if securities are priced highly and a larger coverage of small investors if the price is low (Brennan & Copeland, 1988). Lin, Singh, and Yu (2009) also find that stock splits benefit firms by decreasing the costs of capital CHINA JOURNAL OF ACCOUNTING STUDIES 31 equity financing, especially for those less liquid firms. Another hypothesis emphasises the signalling role of large stock dividends. Ikenberry et al. (1996) propose that a firm undertaking large stock dividends is reflective of a manager’s confidence, as doing so puts the firm’s stock price at risk of falling out of the optimal range. Rankine and Stice (1997) point out that the accounting difference between stock splits and large stock dividends are overlooked in the previous literature. They propose that because retained earnings and capital surpluses are closely linked to cash distributions and debt covenants, undertaking large stock dividends inevitably decreases a firm’s financial flexibility. Hence, compared with pure stock splits, large stock dividends may serve as a more credible signal, as firms without favourable information to convey find them too costly to imitate. After distinguishing the different accounting treat - ments, Rankine and Stice (1997) find that market reactions to large stock dividends are much greater than pure stock splits. Louis and Robinson (2005) posit that managers use large stock dividends to reinforce the credibility of the accrual signal and lead investors to ensure per- manent rather than temporary earnings growth (Asquish, Healy, & Palepu, 1989). However, He and Chen (2003) conclude that the ‘signalling’ and ‘liquidity’ hypotheses do not work in China. The behavioural finance literature likens stocks that are undergoing large stock dividends to lotteries that fulfil unsophisticated investors’ desire to gamble (Kumar, 2009; Zheng and Sun, 2013). Another viewpoint of the large stock dividends anomaly from a behavioural finance perspective is the ‘low price illusion’ (Baker et al., 2009; Li et al., 2014; Yu, Lu, & Xu, 2014), as some investors hold the subconscious and incorrect belief that cheaper stocks are more likely to rise than fall. The opportunistic behaviour in which insiders engage via large stock dividends has recently drawn close attention in both foreign and domestic studies. For example, Devos, Elliott, and Warr (2015) find that CEO option grants are timed to occur on or before large stock dividends; for stock sales, the majority occur afterwards. Lu (2011) finds evidence of insiders’ price manipulation in his case study of a Chinese A-share listed company. Han et al. (2012) and Xiao and Yu (2012) find that companies implementing managerial stock incentives are more likely to issue large stock dividends to push up stock prices and receive more compensation. Han et al. (2012) also document that a firm is more likely to pay large stock dividends when an incentive is more welfare oriented or the board chairman is also included. 2.2. Research on private placement Wruck (1989) argues that a private placement brings in outside governance and equity concentration and so mitigates the agency problems between shareholders and managers, thereby increasing the value of the firm. However, Barclay et al. (2007) find that large price discounts are made in private equity offerings when entrenched managers want to attract passive investors to solidify their control of the firm. Under weak investor protection in China, the private placement is accused of conflicts of interest and tunnelling made by the largest shareholder. For example, the largest shareholders engage in upward earnings management (Zhang, 2010) and manipulate the timing of temporal listing suspensions (Wu et al., 2013; Zhu et al., 2008) to obtain a favourable issue price. They also deliberately put inferior assets into a firm in exchange for newly issued shares and appropriate small shareholders by under - taking aggressive cash dividends (Zhao et al., 2011; Zhu et al., 2008) and frequent related party transactions (Wang, Zhang, & Lin, 2010) after a private placement. 32 C. CUI ET AL. Table 1. t he statistics of a-Share-f irms’ large stock dividends in recent years. Not less than 10 for 5 Not less than 10 for 10 New shares from Year Num Freq Num Freq retained earnings Total firms 2006 95 0.066 27 0.019 0.133 1435 2007 106 0.068 45 0.029 0.194 1549 2008 256 0.160 102 0.064 0.190 1603 2009 124 0.071 42 0.024 0.155 1752 2010 240 0.114 80 0.038 0.191 2107 2011 442 0.189 227 0.097 0.108 2341 2012 442 0.179 200 0.081 0.049 2470 2013 337 0.134 177 0.071 0.065 2512 2014 389 0.148 227 0.086 0.055 2631 notes: t his table is hand-collected from CSMar database. Num is the number of firms paying large stock dividends, Freq is the ratio that such firms account for the total firms. New shares from retained earnings is the ratio that new shares trans- ferred from retained earnings to the total new shares generated by the large stock dividends. Prior literature in this field mainly analyses the tunnelling problem caused by controlling shareholders and the ways in which small shareholders are expropriated in China. An appar- ent deficiency of these studies is their disregard for the wealth-transfer problem via large stock dividends carefully designed for outside investors. Our paper extends this literature from the perspective of those investors who engage in private securities offering. 3. Institutional background and hypotheses Table 1 provides a brief summary of large stock dividends paid during 2004 and 2014. About 10–20% of listed firms undertook large stock dividends each year during the sample period. Large stock dividends totalling more than ‘10 for 10’ have been increasing in recent years, with a percentage approaching 10% in 2011, 2012 and 2014. Table 1 also indicates that the large stock dividends are primarily from capital surplus rather than retained earnings. Although firms’ incentives to split shares and issue large stock dividends and the corre - sponding positive market reactions can be largely explained by liquidity theory and signal- ling theory in foreign mature capital markets, these arguments are indeed treated with scepticism in China, where unsophisticated private investors account for large proportions of investors (He & Chen, 2003). In China, investors are enthusiastic about the ‘Tianquan effect’ much more than the reasonable demand for liquidity (Yu et al., 2014; Zheng & Sun, 2013). Furthermore, the mechanism proposed by Rankine and Stice (1997) does not exist in China. The par value of listed shares is mostly 1 RMB and the common accounting practice adopted in China is that newly issued shares are transferred from retained earnings or capital surplus at par value rather than market value. Thus, nearly every firm has the ability to issue large stock dividends without encountering profitability and growth opportunity. roughly speaking, in China, the ‘ t ianquan effect’ refers to the phenomenon that the stock price goes up after a firm pays dividends, especially stock dividends. as the stock price should be adjusted according to the split or the dividend factor at the ex-day, there would be a ‘huge price drop’ in the K-chart. investors hope the adjusted price could rise back to the original price before the ex-day. in the Chinese language, ‘t ianquan’ means fill in the gaps, if the stock price rises after the ex-day, the gap between the ex-price and the original price is narrowed in the K-char. investors, especially small investors, are very eager for this effect in China. a ctually there is no explicit regulation that the par value of stocks must be 1 yuan in China, it’s quite a common practice and in our sample period there is only one exception Zijin Mining (601899), whose face value is 0.1 yuan. as it has been a norm that stocks keep their face value unchanged, it’s impossible in China that firms could increase share numbers by splitting shares directly. CHINA JOURNAL OF ACCOUNTING STUDIES 33 The potential for scandals through misuse of large stock dividends has gradually been caught by media and academic studies such as those by Han et al. (2012), Lu (2011) and Xiao and Yu (2012). Both anecdotal evidences and academic studies indicate some opportunistic features of the corporate payout incentive. However, our paper focuses on another situation in which large stock dividends are used intentionally: a conspiracy to grab more profits for private placement investors who can collude with firms. It is well known that investors put huge amounts of funds into one private placement, enduring information asymmetry and stock selling restrictions (Barclay et al., 2007; Silber, 1991; Wruck, 1989). As such, they often require high returns and take precautions such as price discounts (Silber, 1991; Wruck, 1989) and covenants to control the risk. Such investors may also be dominant in negotiations with financers, and firms sometimes will obey their suggestions to raise funds from them or make a large concession in order to keep them silent (Barclay et al., 2007). In this way, private placement investors are able to affect payout policy. In the Chinese A-share stock market, large stock dividends meet the needs of in-private placement investors, and those paid at the right time would guarantee higher returns. In the case of firms, large stock dividends do not cost too much under the loose regulations and accounting rules, as stock dividends merely involve accounting adjustments between different accounts. It would therefore be embarrassing for firms to reject such a requirement. We expect that they would be happy to offer a hand by issuing large stock dividends during the unlocking period of the privately offered shares in favour of those investors. Thus, based on the above discussion, we propose the first hypothesis as follows. H1: Firms are more likely to pay large stock dividends during the unlocking period of the privately issued shares than during other periods. The outside investors involved in private placement are different from the largest shareholder in many aspects. Outside investors suffer more from information asymmetry. Deng and Liao (2013) hold the opinion that private placements are arranged to optimise the controlling shareholder’s profit. As such, it may be a signal that the issuing price is too high when outside investors are also invited to share the same project. Zhang (2010) also finds that companies make upward earnings management the year before a private placement when outside investors are also included in the private offering. The adverse selection problems mentioned previously make outside investors more vulnerable in the pricing of new shares, putting them in urgent need of alternative methods to guarantee self-protection. In addition, outside investors are mainly rewarded by selling their shares in the secondary market and are very sensitive to stock price. As the Chinese A-share stock market is more suitable for speculation rather than value investing, outsider investors are usually speculators rather than strategic investors. They, whose shares are generally locked within a year, are not patient enough to wait for real improvements in a firm’s fundamentals in the long run. Such speculators naturally favour large stock dividends, which can be effective price boosters. in China, privately offered stocks are not allowed to be sold immediately after the placement is accomplished. t he outside investors are required to hold the new issued stocks for at least one year, while the largest shareholder shall hold for no less than three years. t his period is called the ‘locked period’ by the regulators, so we use unlock here meaning that those investors are no longer restricted by the above rules and get free to sell shares. 34 C. CUI ET AL. Table 2. Basic information about the 10 investors in Company a ’s private placement. Shares acquired Shares acquired/ Shares acquired/ Lock-up period Investors (10 thousand) new issued shares total shares (month) investor P 2400 31.33% 10.36% 12 investor Q 1600 20.89% 6.91% 12 institutional investor a 800 10.44% 3.45% 12 institutional investor B 800 10.44% 3.45% 12 institutional investor C 500 6.53% 2.16% 12 Mr X (the controlling 400 5.22% 35.54% 36 shareholder) individual investor a 380 4.96% 1.64% 12 individual investor B 350 4.57% 1.51% 12 individual investor C 230 3.00% 0.99% 12 individual investor d 200 2.61% 0.86% 12 note: t his table is hand-collected from Company a ’s private placement documents. As for the input in exchange for the new shares offered in a private placement, it is com- mon practice for the largest shareholder to pay with real assets. Nevertheless, outside inves- tors pay almost exclusively in cash. Sometimes a private placement is part of the controlling shareholder’s business restructuring plan, tunnelling practices or even involvement in gov- ernment intervention. Therefore, firms are likely to pay large stock dividends according to the will of outside investors, who are more dominant in the negotiations because they pay in cash and really mitigate the financial pressure of firms. Furthermore, the basic viewpoint drawn from related Chinese research (Wu et al., 2013; Zhang, 2010; Zhao et al., 2011; Zhu et al., 2008), i.e. that a private placement reflects the tunnelling incentive of the controlling shareholder, implies that large stock dividends may also be used to bribe outside investors and discourage them from strictly supervising the use of funds and the quality of the project. Only with the permission of outside investors can the largest shareholders engage in opportunistic behaviour more easily. Based on the preceding arguments, we propose our second hypothesis as follows. H2: Firms are more likely to pay large stock dividends during the unlocking period of outside investors than during the unlocking period of the controlling shareholder. 4. The case study of Company A Before conducting the large sample empirical test, we briefly introduce the case of Company A to illustrate how a large stock dividend is used to help private placement investors sell their shares. On 23 November 2012, Company A raised 762,744,338.23 yuan from 10 inves- tors, including its controlling shareholder, Mr X, through private equity offerings at 10.14 yuan per share. Of the ten participators, Investor P and Investor Q were the top two largest investors. Table 2 presents detailed information about the private placement. The new shares issued in the private placement were registered on Shenzhen Stock Exchange on 30 November 2012, but Fortune International, Xining Investment and other outside investors could not sell their shares until 30 November 2013. Company A announced its 2013 payout plan on 3 January 2014, just one month after the shares of the outside t he issuing price has a 15.57% discount compared with the closing price of the last day and a 87.87% discount compared with the averaging price of the last 20 trading days. CHINA JOURNAL OF ACCOUNTING STUDIES 35 Table 3. t imeline of related events in Company a ’s case study. No Date Brief descriptions of the events 1 23 november 2012 Company a issued 76.6 million new shares through private equity offerings to 10 investors including Mr X, the controlling shareholder, and raised 762,744,338.23 yuan in total. among the 10 participators, i nvestor P and investor Q were the top 1 and 2 investors, respectively. 2 30 november 2012 t he new shares issued were registered in the Shenzhen Stock exchange. 3 26 april 2013 t he 2013 first-quarter report was released, declaring a rapid growth of net profits by 143.44% and operating income by 20.73% compared with the same period in the previous year. 4 31 July 2013 t he 2013 half-year report was released, declaring good news just as in the first quarter. Company a ’s profit increased by 273.29%, and the operating income increased by 15.57% compared with the same period in the previous year. 5 26 o ctober 2013 t he 2013 third-quarter report was released. however, the net profit earned in the third quarter decreased largely in contrast to the third quarter of 2012. t aking the first three quarters together, Company a still keeps a large growth in its net profits and operating incomes, with growth rates of 18.99% and 19.51%, respectively. Company a ’s reason for the fall in the third quarter was ‘the new project was just put into use and didn’t evolve as expected’. 6 30 november 2013 investor P, investor Q and other outside investors were permitted to sell their shares. 7 3 January 2014 t he controversial ‘10 for 10’ dividends proposal was disclosed. 8 4 January 2014 investor Q sold all of its shares at an average price of 6.4 yuan. 9 4 January 2014 Company a ’s notification for Xining i nvestment’s sale was released. 10 27 January 2014 investor P sold its 0.99% shares of Company a at an average price of 6.5 yuan. 11 10 f ebruary 2014 investor P sold another 4% of its shares via the block trading system at 7.03 yuan on average. 12 12 f ebruary 2014 Company a ’s notification of the sale of f ortune international was disclosed. 13 28 f ebruary 2014 Company a disclosed the management earnings forecast. i ts operating income and net profits were anticipated to drop by 76.82% and 67.67%, respectively. 14 26 april 2014 Company a released its 2014 first-quarter report. however, the nine outside investors involved in the private placement were no longer in the list of the top ten shareholders. notes: t his table is based on Company a’s financial reports and other related disclosures, including the private place - ment prospectus, first-quarter, half-year, third-quarter and annual reports, payout proposals, and management earnings forecasts for 2013. all of the documents are available on the official website of Shenzhen Stock exchange (http://www.szse.cn/). investors became tradable. In this announcement, Company A proposed ‘exciting’ large stock dividends, involving ten shares transferred from capital surplus for every existing ten shares. Neither illustrations nor pre-revelations about Company A’s performance in 2013 were men- tioned. However, just one day after the large stock dividends was declared, Company A disclosed that Investor Q sold all of its shares at 6.4 yuan the day before. After that, on 12 February, Company A announced that Investor P had also sold 4.62 million shares on 27 January at 6.5 yuan (accounting for 0.99% of the total shares) and 18.53 million shares on 10 February at 7.03 yuan, respectively. Company A then reported its earnings forecast of 2013 (released on 28 February 2014). The firm’s operating income and net profit decreased sharply by 76.82% and 67.67%, respectively, compared with the previous year. Table 3 shows the timetable of the main issues in this case. Figure 1 denotes the market reactions to the large stock dividends. We conjecture that Company A’s large stock dividends were ‘carefully designed’. Investor P and Investor Q sold their shares right in the interval between the time of Company A’s large stock dividends announcement day and its management earnings forecast day. In China, it is quite unusual for a firm to release its payout plan more than one month before Xining investment once held 32 million shares, accounting for 6.91% of Company a ’s total shares. 36 C. CUI ET AL. Figure 1. t he market reaction of Company a ’s large stock dividends announcement during the window [–15, 120]. its management earnings forecast, and some key statements in Company A’s dividends proposal were suspected of being misleading and overly optimistic. In addition, Company A did not remind investors that its block holders were going to sell large quantities of shares in advance, which is typically required by regulations. In contrast to the big drop of earnings in the fourth quarter of 2013, the first quarter and half-year reports saw a rapid growth. Some unfavourable signals did emerge in the third quarter, but they were covered up by an ambig- uous explanation: ‘the new project was just put into use and didn’t evolve as expected’. Therefore, Company A was accused of deliberately cheating other investors by maintaining the illusion that some big good news remained private; but its overall performance in 2013 was a loss of 0.346 billion yuan. Figure 1 shows the abnormal returns of Company A’s large stock dividends within [–10,120], based on the event date: 3 January 2014. It also shows significant positive abnor - mal returns around the announcement date and the 14th (23 January), 16th (27 January) and 20th (7 February) trading dates. This means that before the preliminary earnings were released publicly, the investors take the large stock dividends news as good news. In the meantime, the stock price of Company A rose from 5.53 yuan 10 days before the event date (19 December 2013) to 7.98 yuan (17 February), a rise of approximately 44%. In contrast, the market return dropped by –2.50%. Taking advantage of this rising wave, Investor P and Investor Q succeeded selling their shares and earned as much as 26.23% and 36.57%, respec- tively. Afterwards, the stock price of Company A dropped gradually, and the investors fol- lowing the large stock dividends irrationally experienced the loss of overreaction. In fact, Company A’s project financed by this offering was suspected by the media to be a redundant construction. Why did the investors who joined this placement turn a blind eye to such a hopeless project? Were they bribed by Company A’s large stock dividends and hence ambivalent to the project’s quality? t he majority of dividend proposals in China are a formal part of the annual reports, and allow investors to determine whether large stock dividends will be paid for the first time. however, Company a ’s ‘10 for 10’ dividends were announced more than three months before its annual report and more than one month ahead of its management earnings forecast, which is quite unusual in China. it has been expressly stressed in the dividend proposal that Company a ’s ‘10 for 10’ dividends were proposed by its controlling shareholder, Mr X, and, in his eyes, investors deserve such a large stock dividend as the company is believed to have a bright fortune. CHINA JOURNAL OF ACCOUNTING STUDIES 37 In order to answer these questions, we conduct further empirical tests to examine the influence of private placement on the behaviour of the firms’ large stock dividends. 5. Research design 5.1. Sample selection and the data sources Our sample comprises A-share firms listed on the Shanghai Stock Exchange and Shenzhen Stock Exchange, excluding firms in the financial industries, firms that entered the stock market via reverse acquisition in the name of private placement and observations with missing values. Our final sample ranges from 2006 to 2014 and contains 13,590 firm-year observations. Financial accounting data are downloaded from the CSMAR (China Stock Market & Accounting Research) database, and information about private placement is col- lected from the WIND database. To eliminate the influence of outliers, all continuous variables are winsorised at the 1st and 99th percentile values. 5.2. Research models We use the probit model to examine our hypothesis and use the order-probit model as a robustness check. In addition, we use the continuous variable stock dividends ratio (Persz) as the dependent variable and use the firm fixed effect to control for firm’s time invariant factors. Following Han et al. (2012), He and Chen (2003), Li et al. (2014) and Xiao and Yu (2012), we use the following specifications to estimate the effects of private placement on stock dividends: Probit P GSZ = 1 = + PriPlac + Controls + Year + Ind + (1) i,t 0 1 i,t i,t Probit P GSZ = 1 = + Ex_inv + Own_inv + Controls + Year + Ind + (2) i,t 0 1 i,t 2 i,t i,t where GSZ indicates large stock dividends, we use two specific measurements: the first one is the binary variable GSZ1, which is equal to 1 if the stock dividends ratio is equal to 0.5 or greater than 0.5 and 0 otherwise. The second one is GSZ2, which divides the firms into three groups: firms without large stock dividends, firms with normal large stock dividends and a stock dividend ratio between 0.5 and 1 and firms with huge large stock dividends and a stock dividend ratio larger than 1. The key explanatory variable is PriPlac, which equals 1 in two situations. First, for those private placements implemented in the first half year, we set PriPlac to equal 1 if the firm is in the new shares unlocking year and the previous year. Second, for those private placement implemented during the second half year, we set PriPlac to equal 1 in the unlocking year and the following year. In all of the other cases, we set the variable to equal 0. In this way, we can almost fully cover all of the key periods when private place- ment investors have a strong incentive to sell their shares. Furthermore, to distinguish between different private placement investors, we construct both Ex_Inv and Owe_Inv fol - lowing the design of PriPlac. Ex_Inv represents the outside investors and Owe_Inv represents the largest shareholder. We expect that the coefficient of PriPlac is positive in model (1) and that the coefficient of Ex_Inv in the second regression is greater than Owe_Inv. Table 4 pre- sents the definitions of the other control variables. 38 C. CUI ET AL. Table 4. Variable definitions. Variable name Definition GSZ1 a binary variable that equals 1 if the new shares ratio proposed in the firm’s stock dividend policy is not less than 0.5 and 0 otherwise. new shares ratio is measured as: (new shares transferred from retained earnings + new shares transferred from capital surplus)/total shares before stock dividends. GSZ2 a piecewise variable that equals 0 if a firm does not pay large stock dividends, equals 1 if the stock dividends ratio is between 0.5 and 1 and equals 2 if the ratio is larger than 1. l.GSZ an indicator variable that equals 1 if the firm paid large stock dividends in the previous year and 0 otherwise. Persz t he largest new shares ratio proposed by the firm within a year. PriPlac a binary variable that equals 1 in two situations. i f the private placement is done in the first (second) half year, then the year in which the privately issued shares are unlocked and the year before (after) are defined as 1. o therwise, the variable equals 0. Ex_Inv Similar to PriPlac, this variable applies to the private equity investors, whose shares are usually locked for one year. Owe_Inv Similar to PriPlac, this variable applies to the largest shareholders (and its related parties), whose shares are usually locked for three years. Cashdiv a binary variable that equals 1 if the firm paid cash dividends in year t–1. t–1 Size t he natural logarithm of total assets at the end of year t–1. t–1 Roe t he return on equity in year t–1. t–1 Capital t he natural logarithm of the number of the firm’s total shares at the end of year t–1. t–1 Capacity t he stock dividends capacity in the year t–1 calculated as (capital surplus + max{0, retained t–1 earnings}+max{0, surplus reserved–0.25*total shares})/total shares. Growth t he growth rate of the operating income in year t–1. t–1 A-Ret t he market adjusted stock returns in year t–1. t–1 STD t he standard deviation of stock returns in year t–1. t–1 Top1 t he shareholding proportion of the largest shareholder at the end of year t–1. t–1 Reward t he natural logarithm of (1+management compensations) at the end of year t–1. t–1 MS t he total shareholding proportion of the firm’s board members at the end of year t–1. t–1 Incentive a binary variable that equals 1 if stock options were exercised in year t and t+1 and 0 otherwise. Age f irm’s listing age before year t. Year Year dummies. Industry industry dummies classified following the CSrC’s 2001 criterion, we divide the manufacturing sector into ten subgroups using 2-digit SiC codes and other firms into 11 groups using 1-digit SiC codes. We define Capacity in this way because in China listed firms can issue stock dividends by surplus reserve when it is larger than 25% of the firm’s total capital stock. Table 5. d escriptive statistics. Variables N Mean Std Min P25 P50 P75 Max GSZ1 13,590 0.11 0.31 0.00 0.00 0.00 0.00 1.00 Priplac 13,590 0.16 0.37 0.00 0.00 0.00 0.00 1.00 Ex_inv 13,590 0.12 0.32 0.00 0.00 0.00 0.00 1.00 Owe_inv 13,590 0.05 0.22 0.00 0.00 0.00 0.00 1.00 CashDiv 13,590 0.57 0.50 0.00 0.00 1.00 1.00 1.00 Size 13,590 21.71 1.25 18.86 20.86 21.59 22.42 25.39 Roe 13,590 0.06 0.20 –1.04 0.02 0.07 0.12 0.77 Capital 13,590 19.83 0.92 17.94 19.20 19.70 20.30 23.12 Capacity 13,590 2.35 1.83 0.15 1.07 1.93 3.07 11.37 Growth 13,590 0.22 0.61 –0.71 –0.02 0.13 0.30 4.30 A_Ret 13,590 –0.01 0.53 –1.33 –0.23 –0.07 0.14 2.36 STD 13,590 0.02 0.01 0.01 0.02 0.02 0.03 0.04 Top1 13,590 0.37 0.15 0.09 0.24 0.35 0.49 0.75 MS 13,590 0.04 0.13 0.00 0.00 0.00 0.00 1.10 Reward 13,590 13.71 0.83 11.53 13.19 13.76 14.28 15.69 Incentive 13,590 0.04 0.19 0.00 0.00 0.00 0.00 1.00 Age 13,590 10.64 4.85 2.00 6.00 10.00 13.00 20.00 CHINA JOURNAL OF ACCOUNTING STUDIES 39 6. Empirical results 6.1. Descriptive statistics The descriptive statistics in Table 5 indicate that during our sample period 11% of firms undertook large stock dividends. About 16% of the observations are in the privately offered shares unlocking period. Stock unlocking periods for private placement outside investors account for 12% of the total observations, whereas only 5% of the observations are during the privately issued shares unlocking period of the controlling shareholder. About 57% of the firms also pay cash dividends. The other control variables are mainly consistent with previous studies (Han et al., 2012; Li et al., 2014; Xiao & Yu, 2012). 6.2. Market reactions In the first step, we conduct event studies to determine whether large stock dividends can bring large stock returns for the private placement investors in the unlocking period. Figure 2 shows that large stock dividends could create more than 10% abnormal returns in the short term. However, the positive returns fade away in two years. Figure 2 implies that large stock dividends could absolutely give private placement investors the chance to sell their stocks. However, in the long run, the losses due to overreaction are paid by other investors. 6.3. Results of multivariate regressions Panel A of Table 6 reports the effects of the private placement on the large stock dividends policies of firms. Columns (1)–(3) show that PriPlac is significantly positively related to GSZ1, GSZ2 and Persz. The coefficients of the other variables are generally consistent with our expectations. Figure 2. t he long-run market reactions before and after large stock dividends payment of firms whose new issued private equities are during the unlocking period. notes: t he sample used to draw weekly abnormal returns within the window [–10, 104] in this figure is large stock dividends occurring within the sixth month and the fourth year after the private placement. expected returns are measured by equally weighted market returns and five size-sorted portfolios adjusted returns corresponding to Bhar1 and Bhar2 respectively. in order to prevent any contaminates from consecutive large stock dividends, we only keep observations without any other large stock dividends within two adjacent years. t he final sample consists of 270 observations. 40 C. CUI ET AL. Table 6. empirical results of h1 and h2. Panel A H1 Panel B H2 (1) (2) (3) (4) (5) (6) Probit Order-Probit FE Probit Order-Probit FE Variables GSZ1 GSZ2 Persz GSZ1 GSZ2 Persz Priplac 0.634*** 0.611*** 0.096*** (15.03) (15.03) (10.09) Ex_Inv 0.688*** 0.672*** 0.120*** (15.39) (15.70) (10.61) Owe_Inv 0.315*** 0.302*** 0.051*** (4.24) (4.20) (4.48) Ex_Inv- Owe_Inv 0.373*** 0.370*** 0.069*** Chi (19.18) (21.15) (22.78) l.GSZ 0.108** 0.076 0.108** 0.074 (2.10) (1.53) (2.06) (1.48) CashDiv –0.054 –0.061 –0.013* –0.064 –0.06 –0.013* (–1.33) (–1.53) (–1.83) (–1.40) (–1.60) (–1.90) Size 0.152*** 0.157*** 0.061*** 0.157*** 0.162*** 0.063*** (4.08) (4.28) (6.09) (4.23) (4.42) (6.27) Roe 0.626*** 0.620*** 0.025** 0.626*** 0.620*** 0.024** (5.12) (5.13) (2.48) (5.12) (5.13) (2.43) Capital –0.385*** –0.386*** –0.244*** –0.387*** –0.388*** –0.247*** (–8.04) (–8.16) (–14.22) (–8.09) (–8.23) (–14.53) Capacity 0.164*** 0.163*** 0.070*** 0.163*** 0.162*** 0.068*** (13.30) (13.58) (15.33) (13.21) (13.50) (15.15) Growth 0.107*** 0.107*** 0.010** 0.096*** 0.096*** 0.007* (4.48) (4.46) (2.53) (3.91) (3.89) (1.92) A_Ret 0.134*** 0.135*** 0.011*** 0.126*** 0.126*** 0.009** (4.41) (4.55) (2.68) (4.09) (4.21) (2.29) STD 12.528*** 13.532*** 1.699*** 12.364*** 13.317*** 1.637** (2.88) (3.15) (2.65) (2.84) (3.10) (2.56) Top1 –0.313*** –0.265** 0.091* –0.266** –0.217* 0.108** (–2.60) (–2.25) (1.94) (–2.19) (–1.83) (2.32) MS 0.721*** 0.716*** –0.186* 0.717*** 0.714*** –0.188* (5.61) (5.65) (–1.65) (5.56) (5.62) (–1.69) Reward 0.011 0.003 0.007 0.015 0.007 0.007 (0.42) (0.13) (1.04) (0.54) (0.27) (1.09) Incentive 0.343*** 0.301*** 0.007 0.345*** 0.303*** 0.007 (4.82) (4.64) (0.34) (4.83) (4.65) (0.36) Age –0.042*** –0.042*** –0.004 –0.041*** –0.040*** –0.022 (–8.65) (–8.71) (–0.27) (–8.40) (–8.45) (–1.53) Year & Industry √ √ √ √ √ √ N 13,590 13,590 13,598 13,590 13,590 13,598 R 0.20 0.17 0.33 0.20 0.17 0.34 notes: numbers in parentheses are z statistics clustered by firm for regression (1), (2), (4), and (5) and t statistics clustered by firm for regression (3) and (6). ***, ** and * indicate significant at probability 0.01, 0.05 and 0.10, respectively. Panel B of Table 6 distinguishes the effects of different kinds of investors. Columns (4)–(6) reveal that Ex_Inv and Owe_Inv are significantly positively related to GSZ1, GSZ2 and Persz, respectively. However, the coefficients of Ex_Inv are much larger and more significant than those of Owe_Inv. Panel B suggests that large stock dividends are mainly designed for outside investors rather than the controlling shareholder. Furthermore, it reveals that important details are neglected if we concentrate only on the controlling shareholder’s tunnelling prob- lem as in prior studies, as firms also use large stock dividends to cater to outside investors. We also document similar results when the large stock dividends are defined as 1 only when the stock dividends ratios are larger than 1. We also use the first-order difference to deal with firm-level heterogeneity in our un-tabulated tables, and the results are stable. CHINA JOURNAL OF ACCOUNTING STUDIES 41 6.4. Additional tests 6.4.1. The shares sale of outside investors Table 6 documents only that firms please outside investors via large stock dividends; whether those investors sell their stocks when they have the chance remains unknown. Figure 3 shows that outside investors engage in more selling activities around the announcements of large stock dividends than during the same period of ordinary dividends. Figure 4 compares the averaged shareholding quantity before and after the dividends announcement as another indicator of share selling. The natural logarithm of averaged shareholding quantity goes down sharply after the large stock dividends plan, but no sig- nificant change is seen for ordinary plans. Figure 3. o utside investors’ shares selling activities before and after the dividend announcement date. notes: t he sample here is the outside private placement investor’s selling activities around every dividends announcement within 3 years after the private placement. t he sample is classified into two groups, gSZ=1 ( gSZ=0) represent large stock dividends (ordinary dividends). horizontal axis is the [–20, 80] trading days window around dividends announcement, and the vertical axis is the number of sales activities divided by the total number of affiliated payout policies. Figure 4. t he time trend of the natural logarithm of the numbers of registered shareholders around large stock dividends and ordinary dividends. notes: t he sample here is quarterly data within 3 years before and after the outside investors’ engagement in the private placement. t he horizontal axis is the quarters before and after dividends announcement and 0 represents the quarter when dividends are announced. t he vertical axis is the natural logarithm of averaged shareholding quantity calculated as: ln[(total shares-shares hold by the largest shareholder)/the numbers of registered shareholders]. 42 C. CUI ET AL. Table 7. o utside investors’ selling activities around dividends announcement. (1) (2) (3) (4) Probit Probit OLS OLS Variables Sell Sell △Spa △Spa GSZ1 0.326*** 0.361*** –0.493*** –0.466*** (2.70) (2.84) (–33.78) (–20.73) Size –0.020 –0.024*** (–0.35) (–5.13) Lev 0.137 0.126*** (0.45) (4.29) Roe –1.205*** –0.062 (–2.71) (–0.75) A_Ret 0.155 –0.119*** (1.11) (–6.31) Growth 0.055 –0.021*** (1.16) (–3.13) Year & Industry √ √ √ √ N 4646 4358 4722 4416 R 0.06 0.07 0.23 0.23 notes: numbers in parentheses are z statistics clustered by firm for regression (1) and (2), and t statistics clustered by firm for regression (3) and (4). ***, ** and * indicate significant at probability 0.01, 0.05 and 0.10, respectively. Finally, to perform the regressions, we construct Sell, which indicates whether outside investors sell their stocks, and △Spa, which is the difference between the natural logarithm of averaged shareholding quantity before and after the dividend proposals. Table 7 shows that outside investors are indeed more likely to sell their stocks when the firms pay large stock dividends. 6.4.2. The monitoring and governance role of private placement In this section, we take a further step to examine whether outside investors in a private placement reward the firm for its kindness (large stock dividends) in three dimensions: the largest shareholder’s tunnelling practice, as measured by related party transactions and other receivables according to Jiang, Lee, and Yue (2010), earnings management, and invest- ment efficiency according to Richardson (2006). We conduct a difference-in-difference test to determine whether outside investors reduce their supervision on firms paying large stock dividends. The sample covers three years before and after the private offering (excluding the private placement year itself ). We delete the data for the holistic listing through private placement to avoid big changes in a firm’s size and business after the placement. As we want to examine the role of outside investors, we exclude private equity offerings only issued to the controlling shareholder. The regressions are tabulated in Table 8. The coefficients of After are negative, consistent with the argument of Wruck (1989) that outside investors usually have monitoring effects. However, the coefficients of After #GSZ are significantly positive, suggesting that such effects are drastically attenuated by large stock dividends. Overall, Table 8 indicates private investors’ monitoring roles are reduced because of firms’ large stock dividends, which can further harm the efficiency of the capital market. Large stock dividends may destroy the governance channel in a private placement ( Wruck, 1989) and reduce outside investors’ incentives to undertake active monitoring (Barclay et al., 2007). 6.4.3. Determining whether large stock dividends signal better future performance Asquith et al. (1989) and Louis and Robinson (2005) argue that firms use large stock dividends as a signal of growth opportunities. We also examine this hypothesis. However, Table 9 shows CHINA JOURNAL OF ACCOUNTING STUDIES 43 Table 8. t he monitoring and governance role of private placement. (1) (2) (3) (4) Variables Isam Tunnel Variables DA Variables Absinv After –0.024 –0.017*** After –0.004 After –0.008*** (–1.26) (–3.50) (–1.05) (–3.12) GSZ –0.032 0.008 GSZ –0.003 GSZ 0.002 (–1.25) (1.31) (–0.42) (0.54) After # GSZ 0.078** 0.011* After # GSZ 0.016* After # GSZ 0.009** (2.49) (1.83) (1.91) (2.03) Size –0.035*** –0.016*** Size 0.010*** Size –0.002 (–2.64) (–5.74) (5.02) (–1.59) Lev 0.669*** 0.059*** Lev –0.068*** Lev –0.001*** (7.37) (3.51) (–5.54) (–2.96) Roa –0.078 0.087* Top1 0.000 Roa –0.000*** (–0.35) (1.87) (0.14) (–3.19) Top1 0.003*** 0.000 Invrec 0.159*** OCF 0.044*** (4.05) (0.11) (11.07) (3.18) Tobinq 0.041*** –0.004 lDA 0.061** ADM 0.000*** (2.99) (–1.45) (2.48) (12.85) Growth –0.000** Tunnel –0.075*** (–2.41) (–6.11) Year & Industry √ Year & Industry √ Year & Industry √ N 3473 3622 N 2934 N 3265 2 2 2 R 0.12 0.33 R 0.12 R 0.04 notes: numbers in parentheses are t statistics clustered by firm. ***, ** and * indicate significant at probability 0.01, 0.05 and 0.10, respectively. that to some extent firms with worse future performance would pay large stock dividends more frequently. These findings also hold after considering the effects of private placement, as the interactions are not significant in all of the cases. This result suggests that large stock dividends comprise opportunistic behaviour regardless of firms’ fundamentals. 6.4.4. The controlling shareholders’ ex ante tunnelling incentive The larger the divergence of the largest shareholder’s voting rights and cash flow rights, the more the private equity offering suffers from tunnelling, and the more urgent the need for outside investors to find other methods to assure self-protected interests such as large stock dividends. Table 8 shows that firms bribe outside investors with elaborately designed payout policies to make such investors more tolerant of their opportunistic behaviour. We construct a dummy variable, DSep, which equals 1 if the controlling shareholder’s divergences of the two rights are above the industrial median level before the private placement, and 0 other- wise. For the sake of convenience, our sample only contains private placement with outside investors. The results are presented in Panel A of Table 10. The positive coefficients of DSep provide further support for the idea that firms with higher agency conflicts between control shareholders and minority shareholders are more likely to pay large stock dividends. 6.4.5. The effect of institutional investors It is well known that institutional investors are more powerful in bargaining and more expe- rienced about tricks such as large stock dividends. To test the effect of institutional investors, we use the dummy variable Institution, which equals 1 if there are institutional investors in the top 10 investors of the private equity offering and 0 otherwise, and a subsample com- prising private placement with outside investors. The results are shown in Panel B of Table 10. The results are the same as we predict – firms issuing private equities to institutional investors are more likely to choose large stock dividends policy. 44 C. CUI ET AL. Table 9. Whether large stock dividends are a signal of better future performance. (1) (2) (3) (4) (5) X=Roe X=A_Roe X=△Roe X=Growth X=A_Ret Variables GSZ1 GSZ1 GSZ1 GSZ1 GSZ1 PriPlac 0.696*** 0.701*** 0.697*** 0.697*** 0.590*** (11.33) (13.40) (13.27) (12.43) (9.58) X –0.190 –0.196 –1.020** –0.008 –0.131** (–0.54) (–0.55) (–2.10) (–0.48) (–2.24) PriPlac#X 0.132 0.142 1.570 0.008 –0.187 (0.13) (0.14) (0.91) (0.22) (–1.40) l.GSZ 0.125** 0.125** 0.127** 0.126** 0.198*** (1.97) (1.97) (1.99) (1.99) (2.86) CashDiv –0.062 –0.062 –0.063 –0.063 –0.078 (–1.31) (–1.30) (–1.35) (–1.34) (–1.55) Size 0.190*** 0.190*** 0.193*** 0.187*** 0.197*** (4.16) (4.16) (4.28) (4.09) (4.02) Roe 0.496*** 0.496*** 0.473*** 0.474*** 0.435*** (3.89) (3.89) (3.67) (3.59) (3.08) Capital –0.415*** –0.414*** –0.417*** –0.413*** –0.414*** (–7.33) (–7.32) (–7.42) (–7.26) (–6.87) Capacity 0.171*** 0.171*** 0.170*** 0.171*** 0.177*** (10.24) (10.24) (10.26) (10.27) (9.16) Growth 0.103*** 0.103*** 0.103*** 0.103*** 0.116*** (3.68) (3.68) (3.71) (3.68) (3.74) A-Ret 0.113*** 0.113*** 0.112*** 0.114*** 0.084** (3.53) (3.53) (3.48) (3.53) (2.45) STD 5.599 5.596 5.761 5.175 6.529 (1.02) (1.02) (1.05) (0.93) (1.05) Top1 –0.385*** –0.385*** –0.393*** –0.390*** –0.383** (–2.65) (–2.65) (–2.71) (–2.68) (–2.42) MS 0.691*** 0.691*** 0.686*** 0.684*** 0.981*** (3.43) (3.43) (3.40) (3.40) (4.17) Reward 0.014 0.014 0.010 0.010 0.008 (0.43) (0.43) (0.33) (0.33) (0.23) Incentive 0.375*** 0.375*** 0.370*** 0.371*** 0.315** (3.92) (3.92) (3.91) (3.91) (2.49) Age –0.032*** –0.032*** –0.032*** –0.032*** –0.030*** (–5.13) (–5.13) (–5.16) (–5.10) (–4.24) Year & Industry √ √ √ √ √ N 9492 9492 9492 9449 7801 R 0.19 0.19 0.19 0.19 0.18 notes: numbers in parentheses are z statistics clustered by firm. ***, ** and * indicate significant at probability 0.01, 0.05 and 0.10, respectively. 6.5. Robustness tests We conduct several robustness tests to mitigate the endogeneity concerns. First, according to the accounting policy of the private placement, a firm’s capital reserve increases mechanically after private placement, which also enhances the firm’s ability to pay large stock dividends. To exclude this alternative explanation, we replicate the empirical test using subsamples whose stock dividend payment capacity is above the average in column (1) of Table 11. Our main results remain unchanged. Considering that good firms may pay large stock dividends as a signal of good perfor - mance to draw close attention from investors, we use firms whose Growth or Roe is below the median level in the same industry to rule out this ee ff ct. Our main results are unchanged (tabulated in columns (2) and (3) of Table 11, respectively). CHINA JOURNAL OF ACCOUNTING STUDIES 45 Table 10. t unnelling incentive and institutional investors. Panel A Tunnelling incentive Panel B Institutional Investors (1) (2) (3) (4) (5) (6) Probit Order-Probit FE Probit Order-Probit FE Variables GSZ1 GSZ2 Persz GSZ1 GSZ2 Persz DSep 0.254*** 0.257*** 0.067*** (2.89) (3.06) (3.27) Institution 0.303*** 0.257*** 0.044*** (3.60) (3.14) (2.70) l.GSZ –0.007 –0.040 –0.020 0.032 0.016 –0.006 (–0.07) (–0.44) (–0.94) (0.34) (0.19) (–0.33) CashDiv –0.229** –0.210** –0.063*** –0.273*** –0.278*** –0.070*** (–2.53) (–2.37) (–2.81) (–3.25) (–3.41) (–3.78) Size 0.046 0.069 0.001 0.014 0.040 –0.011 (0.48) (0.72) (0.06) (0.17) (0.48) (–0.61) Roe 1.773*** 1.557*** 0.268*** 1.973*** 1.767*** 0.201*** (3.08) (2.94) (3.08) (5.19) (5.15) (4.64) Capital –0.255** –0.268** –0.037 –0.241** –0.247** –0.022 (–2.23) (–2.41) (–1.36) (–2.41) (–2.49) (–1.07) Capacity 0.190*** 0.189*** 0.057*** 0.198*** 0.196*** 0.056*** (6.17) (6.63) (6.91) (7.15) (7.52) (8.27) Growth –0.083* –0.074 –0.013 –0.002 0.003 0.003 (–1.72) (–1.56) (–1.17) (–0.04) (0.05) (0.24) AdjReturn 0.068 0.071 0.019 0.069 0.070 0.020 (1.15) (1.24) (1.16) (1.21) (1.28) (1.44) Std 7.317 11.200 3.020 8.989 10.699 2.347 (0.71) (1.12) (1.24) (0.91) (1.13) (1.18) Top1 –0.669** –0.550** –0.126* –0.601** –0.513** –0.112** (–2.43) (–2.11) (–1.95) (–2.52) (–2.24) (–2.24) MS 0.485 0.572* 0.160* 0.664** 0.703*** 0.207*** (1.49) (1.84) (1.82) (2.41) (2.64) (2.80) Reward 0.015 –0.007 –0.001 –0.008 –0.025 –0.003 (0.23) (–0.12) (–0.05) (–0.15) (–0.47) (–0.25) Incentive 0.315* 0.218 0.054 0.236 0.192 0.051 (1.93)* (1.55) (1.31) (1.56) (1.44) (1.39) Age –0.043*** –0.038*** –0.009*** –0.035*** –0.034*** –0.007*** (–3.90) (–3.61) (–3.61) (–3.56) (–3.49) (–3.37) Year & Industry √ √ √ √ √ √ N 1489 1492 1492 1966 1966 1966 R 0.17 0.13 0.16 0.17 0.14 0.15 notes: numbers in parentheses are z statistics clustered by firm for regression (1), (2), (4), and (5) and t statistics clustered by firm for regression (3) and (6). ***, ** and * indicate significant at probability 0.01, 0.05 and 0.10, respectively. Firms whose stock prices are too high may also pay large stock dividends to maintain the price within in a reasonable price range. To eliminate this effect, we use a subsample con- taining firms whose stock prices are less than 10 yuan during 30 trading days before the dividends announcement and repeat our main regressions in column (4) of Table 11. Our findings remain stable. To ensure that our results are not mechanically driven by stock offerings, we also construct a subsample containing firms undertaking secondary public offerings in the last three years or firms influenced by private placement (Priplac = 1). In column (5) of Table 11, the coefficient of Ex_Inv is still significantly larger than that of Owe_Inv. We also replicate the empirical tests in Table 11 using the order-probit and firm fixed effect models and define GSZ in another way: GSZ equals to 1 only if the stock dividends ratio is larger than 1, and 0 otherwise. These results are similar as those in Table 11. Due to space limitations, we do not present the table. 46 C. CUI ET AL. Table 11. robust tests 1. (1) (2) (3) (4) (5) Variables GSZ1 GSZ1 GSZ1 GSZ1 GSZ1 Ex_Inv 0.591*** 0.759*** 0.855*** 0.642*** 0.401*** (10.49) (10.14) (11.19) (8.68) (4.30) Owe_Inv 0.294*** 0.308*** 0.415*** 0.301** –0.026 (3.29) (2.76) (3.26) (2.37) (–0.25) Ex_Inv-Owe_Inv 0.297*** 0.451*** 0.440*** 0.341** 0.427** Chi (8.28) (11.85) (8.73) (5.14) (25.00) l.GSZ 0.158** 0.112 –0.086 –0.176 0.031 (2.34) (1.28) (–0.86) (–1.51) (0.38) CashDiv –0.158*** –0.091 –0.105* 0.000 –0.148* (–2.96) (–1.44) (–1.68) (0.01) (–1.94) Size 0.109** 0.170*** 0.040 0.177*** 0.131* (1.98) (3.15) (0.70) (3.62) (1.68) Roe 0.828*** 0.471*** 0.445** 0.440*** 1.750*** (3.60) (3.23) (2.54) (3.44) (3.51) Capital –0.330*** –0.440*** –0.308*** –0.373*** –0.301*** (–4.98) (–6.16) (–3.87) (–5.87) (–3.22) Capacity 0.123*** 0.154*** 0.209*** 0.202*** 0.153*** (8.07) (8.84) (10.32) (9.61) (6.36 Growth 0.102*** 0.277* 0.063 0.115*** –0.045 (2.73) (1.77) (1.34) (3.52) (–1.04) A_Ret 0.138*** 0.086 0.033 –0.086 0.105** (3.49) (1.58) (0.54) (–1.17) (2.12) Std 17.392*** 12.786* 8.939 20.847*** 2.900 (3.06) (1.95) (1.32) (3.56) (0.34) Top1 –0.412*** –0.169 –0.257 –0.312* –0.652*** (–2.62) (–0.90) (–1.39) (–1.88) (–2.90) MS 0.764*** 0.556*** 0.764*** 1.180*** 0.604** (4.79) (2.65) (3.70) (5.08) (2.28) Reward –0.012 0.012 –0.064 –0.020 –0.038 (–0.34) (0.28) (–1.41) (–0.53) (–0.70) Incentive 0.427*** 0.342*** 0.436*** 0.292* 0.205 (4.96) (2.97) (2.74) (1.78) (1.56) Age –0.040*** –0.032*** –0.027*** –0.021*** –0.036*** (–6.24) (–4.46) (–3.47) (–2.97) (–4.13) Year & Industry √ √ √ √ √ N 5924 6919 7102 8347 2485 R 0.16 0.19 0.23 0.17 0.17 notes: numbers in parentheses are z statistics clustered by firm. ***, ** and * indicate significant at probability 0.01, 0.05 and 0.10, respectively. Finally, we also use matching (control firms are collected based on nearest sizes in the same year and industry that did not make private offerings in recent years) and the differ - ence-in-difference test to rule out the reverse causality problem, i.e. only firms used to pay large stock dividends can raise funds through private placement. In Table 12, Priplac equals 1 for the treatment group, and After equals 1 for the years after the private placement. The coefficient of After #Priplac is significantly positive, suggesting that firms are more likely to pay large stock dividends after private placement. However, the coefficient of Priplac is neg- ative, which is opposite to the reverse causality prediction. 7. Conclusion Although it is hard to believe that a mere accounting adjustment between accounts can trigger big waves in the stock market, such stories have repeatedly occurred in China in CHINA JOURNAL OF ACCOUNTING STUDIES 47 Table 12. robust tests 2. (1) (2) (3) Probit Order-Probit FE Variable GSZ1 GSZ3 Persz Priplac –0.142* –0.157** (–1.82) (–2.07) After –0.174*** –0.184*** –0.014*** (–3.58) (–3.88) (–2.60) Priplac # After 0.757*** 0.761*** 0.107*** (8.32) (8.65) (6.87) l.GSZ 0.121 0.075 (1.53) (1.02) Size –0.053 –0.070 –0.013 (–0.88) (–1.19) (–1.16) Roe 0.142** 0.142** 0.086*** (2.09) (2.20) (4.56) Capital 0.898*** 0.891*** 0.036* (3.47) (3.14) (1.68) Capacity –0.320*** –0.313*** –0.348*** (–4.09) (–4.14) (–11.57) Growth 0.145*** 0.146*** 0.067*** (7.22) (7.68) (8.90) A-Ret 0.120*** 0.108*** 0.013* (2.87) (2.59) (1.82) STD 0.111** 0.121*** 0.009 (2.33) (2.70) (1.46) Top1 4.180 5.718 1.293 (0.58) (0.82) (1.16) MS –0.500** –0.456** –0.020 (–2.46) (–2.32) (–0.20) Reward 0.838*** 0.874*** –0.214 (3.85) (4.03) (–1.14) Incentive 0.023 0.018 0.006 (0.51) (0.40) (0.46) Age 0.446*** 0.365*** 0.014 (4.05) (3.87) (0.59) Year & Industry √ √ √ N 8575 8575 8575 R 0.18 0.16 0.39 notes: numbers in parentheses are z statistics clustered by firm for regression (1) and (2), and t statistics clustered by firm for regression (3). ***, ** and * indicate significant at probability 0.01, 0.05 and 0.10, respectively. recent years. It has been a regular pattern that stock prices rise substantially around the announcements of large stock dividends and the ex-dividend date. Our paper indicates that large stock dividends provide outside investors involved in a private placement a chance to deliberately take advantage of other investors’ irrationality to sell their stocks. We argue that large stock dividends in China have deviated from their original function as a signal or a way to promote liquidity, encouraged by classical financial theory, and find that even firms that underperform, experience low growth and have stock prices as low as 10 yuan, still appear to misuse large stock dividends to profit at the expense of minority investors in the stock market. We also find evidence that large stock dividends distort the economic efficiency of private placement, an important channel of equity refinancing, and encourage opportunistic behaviour in those private placements. Since large stock dividends take away almost all of the risks that should be endured by outside investors, there is no need for such investors to be prudent, as they can benefit even from bad projects. Therefore, 48 C. CUI ET AL. large stock dividends destroy the regular monitoring and governance roles of private placements. Unsophisticated investors are often irrational, overreact to large stock dividends in the short run and ultimately bear the losses as a firm’s accounting and market performance decrease (Li et al., 2014). Our paper also warns regulators that, in the Chinese stock market – characterised with its speculative atmosphere, weak investor protection and abundance of retail investors – large stock dividends may even result in several severe problems, such as profit expropriation and price manipulation, in extreme circumstances. Acknowledgements We are grateful for the helpful comments and suggestions from Professor Cong Wang from CUHK and two anonymous referees. 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Journal
China Journal of Accounting Studies
– Taylor & Francis
Published: Jan 2, 2017
Keywords: Private placement; large stock dividends; dividend policy; wealth transferring
