Corporate governance and dividend policy: A comparison of Chinese firms listed in Hong Kong and in the Mainland

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China Economic Review 19 (2008) 437 – 459

Corporate governance and dividend policy: A comparison of Chinese firms listed in Hong Kong and in the Mainland ☆ Haiyan ZHANG Accounting Department, School of Economics and Management, Tsinghua University, China Received 27 February 2007; received in revised form 7 December 2007; accepted 11 January 2008

Abstract This study compares the cash dividend policy of Chinese firms listed in Hong Kong and on the Mainland. It shows that, in both groups, firms that have higher managerial membership on the board tend to pay lower cash dividends. The relation is stronger in Mainland-listed firms, indicating that managers' influence on the board creates more serious agency problems. This study further shows that ownership concentration of Mainland-listed firms tends to weaken the association between managerial membership on the board and lower cash dividends, suggesting that concentrated ownership in the Mainland reduces the agency cost. Finally, this study shows that there is a price premium attaching to dividend payout of HK-listed Chinese firms, but there is no such premium in the Mainland market. Further, the same dividend premium is also observed in local firms listed in Hong Kong. Taken together, this study indicates that the pricing mechanism of Hong Kong's equity market appears to encourage managers of HK-listed firms to pay dividends. The same mechanism is not found to exist in the Mainland market. This difference helps to explain the finding that the controlling shareholders of HK-listed firms take a less active role in dividend policy than those of their peers on the Mainland. Thus, Hong Kong's equity market seems to provide a mechanism that can be used by Chinese firms listed there. © 2008 Elsevier Inc. All rights reserved. JEL classification: G18; G28; G35 Keywords: Cash dividend; Ownership concentration; Managerial membership on the board; Agency cost; Pricing mechanism

1. Introduction Up to the end of 2003, over 200 Chinese firms have raised more than US$45 billion through initial public offerings (IPO) on Hong Kong's stock market. These companies have become so important in Hong Kong that they now account for about one-sixth of the number of listed companies, 30% of market capitalization, and 40% of trading volume in the city's stock market. The amount they raise in Hong Kong also consistently outpaces the amount of the IPOs in China's two domestic stock markets in Shanghai and Shenzhen. In addition, most of firms listed in Hong Kong are among

☆ This paper is based on my PhD thesis in Hong Kong University of Science and Technology “Corporate Governance and Dividend Policy: a Comparison of Chinese Firms Listed in Hong Kong and in the Mainland”. I am fully grateful to my supervisor, professor Kevin C. W. Chen. I also want to express my sincere gratitude to Professor Peter Chen, Vidhan Goyal, Gilles Hilary and Bin Ke, for their valuable comments and inputs. E-mail address: [email protected].

1043-951X/$ - see front matter © 2008 Elsevier Inc. All rights reserved. doi:10.1016/j.chieco.2008.01.001

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China's largest state-owned enterprises (SOEs) in strategically important industries such as petroleum, telecommunications, banking, steel and infrastructure. Thus, Hong Kong has become an important channel for Chinese companies to tap into international equity capital. Likewise, the continuous flow of new Chinese firms also enables Hong Kong's stock exchange to maintain its top ten position in the world in terms of market capitalization. There arises the issue of whether Hong Kong's market provides a better monitoring function than China's domestic market. Although Hong Kong provides relatively better protection of shareholders (La Porta, Lopez-de-Silanes, Shleifer & Vishny, 2002, hereafter referred to as LLSV), there are at least two reasons that Chinese firms listed in Hong Kong might not behave in the same way as local companies. For one thing, Hong Kong's regulation of listed companies relies largely on self-compliance, while executives of Chinese firms are used to following governmental decrees and guidance. For another, nearly all the Chinese firms have their operations located in the Mainland. Regulatory agencies of Hong Kong are unfamiliar with complex transactions in the Mainland, which may leave a regulatory vacuum. The Euro-Asia Agriculture case in 2002 is a good example: Hong Kong regulatory bodies became aware of fraud only after authorities in the Mainland detained the chairman of the board due to his personal irregularities. Thus, a comparison of the mechanisms and outcomes of corporate governance between the Chinese firms listed in Hong Kong (“HK-listed firms” hereafter) and those listed on the Mainland (“Mainland-listed firms” hereafter) can provide useful insights for regulators and investors in both jurisdictions. As to the governance mechanisms, this study compares the board composition and ownership structure of the two groups of firms, since they are the focus of most governance-related regulations. Results suggest that HK-listed firms have boards with more managerial influence than that of the Mainland-listed firms: the former have more cases of combined titles of board chair and CEO, and a larger fraction of managers on the board. Besides, HK-listed firms have more concentrated ownership, even though both groups are dominated by a single large shareholder. I then compare the cash dividend policies between the HK- and Mainland-listed Chinese firms. Dividend behavior is chosen because it has typically been used in the literature as the outcome of corporate governance (La Porta, Lopez-deSilanes, Shleifer & Vishny, 2000; Faccio et al., 2001). Empirical results show that Mainland-listed firms with combined title of CEO and board chair tend to pay lower cash dividends, but there is no such evidence for HK-listed firms. The results also show that the fraction of managers on the board is associated with lower dividend payouts in both Chinese groups. The relation is stronger in Mainland-listed firms, indicating that managers' influence on the board creates more serious agency problems. Further, ownership concentration of Mainland-listed firms tends to weaken the association between managerial membership on the board and lower cash dividends. This indicates that concentrated ownership in the Mainland reduces the agency cost of free cash flows. Finally, this study finds that there is a price premium attached to dividend payout for HK-listed firms, but there is no such premium in the Mainland market. Moreover, the same dividend premium is also observed in local firms listed in Hong Kong. The results are robust after controlling for the endogenous relation between valuation and dividend payout. Taken together, the pricing mechanism of Hong Kong's equity market appears to encourage managers of HK-listed firms to pay dividends. The same mechanism is not found to exist in Mainland's market. This difference helps to explain the finding that the controlling shareholders of HK-listed firms take a less active role in dividend policy than those of their peers in the Mainland. Thus, Hong Kong's equity market seems to provide a mechanism that can be used by Chinese firms listed there. The remainder of the paper is organized as follows. Section 2 explains the institutional background in Hong Kong and the Mainland. Section 3 lays out the hypotheses about dividend policy. Section 4 analyzes methodology and data sources, and empirical results are reported in Section 5. Section 6 outlines conclusions and future studies. 2. Institutional background 2.1. Listing of Chinese firms in Hong Kong Chinese companies listed in Hong Kong can be classified as Mainland-registered and Hong Kong-registered, with slightly different listing rules. The wave of Mainland-registered enterprises listing in Hong Kong started with the IPO of Tsingtao Brewery in July 1993. Since then, more and more Mainland enterprises obtained approval to list in Hong Kong. Most of these enterprises are leading companies of major industries, such as PetroChina, China Eastern Airlines and Huaneng Power.

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Companies incorporated in the Mainland and approved by the China Securities Regulatory Commission (CSRC) for a listing in Hong Kong are called H-share companies, the letter H stands for Hong Kong. H-share companies are traded in Hong Kong dollars, but financial statements are reported in RMB yuan. Like firms listed in China's domestic markets in Shanghai and Shenzhen, the portion of shares controlled by state or institutions is non-tradable: only shares held by public investors can be traded on the secondary market. This is a result of Chinese government's intention to prevent large scale and rapid privatization.1 The listing of Hong Kong-registered Chinese enterprises can be traced back to the early 1980s. At the beginning, most enterprises obtained their place in Hong Kong Stock Exchange (HKEx) through back-door listings. A back-door listing occurs when a third party takes a significant stake from a major shareholder in a shell or dormant company listed on the exchange. The first wave of back-door listings of mainland enterprises came in the mid-1980s, led by Hong Kong's China International Trust and Investment Corporation (CITIC) buying Ka Wah Bank.2 These companies are typically subsidiaries established by central government agencies or provincial governments to facilitate overseas business. A Chinese controlled company incorporated and listed in Hong Kong is called a “red chip” company, the word red comes from “red China” (Trenck, Cartledge, Daswani, Katz, & Sakmar, 1998).3 Red chips are traded in Hong Kong dollars, financial statements are also reported in the same currency. A red chip company is more like a local firm listed in Hong Kong in that all shares are tradable. The full floating of shares increases the transparency of transferring shares, leaving stock price less distorted.4 Recently, the distinctions between H-shares and red chips have become blurred. Many leading companies are issued as red chips, such as China Mobile, China Insurance and China National Offshore Oil Corp (CNOOC). At the same time, a large number of small companies, including private enterprises, are classified as H-share. Consequently, most part of this study will treat H-share and red chip as a whole group; they will be treated separately when necessary. 2.2. Comparison of H-shares, red chips, Chinese companies listed in Mainland and local Hong Kong listed companies This section describes the fundamental characteristics about Chinese firms listed in Hong Kong and the Mainland (Chinese firms listed on the Mainland are called A-share companies). To obtain a complete picture, local firms listed in Hong Kong will also be studied. In particular, H-share and red chip will be analyzed separately to examine potential difference between these two groups. Table 1 contains descriptive statistics of these four groups. The table shows that H-share and red chip companies are larger and have a higher turnover ratio, better accounting profitability and higher PE, PB ratios than local firms listed in Hong Kong. As to the difference between H-share and red chip companies, H-share companies are better than red chips in all four aspects.

1 Legal Person (LP) and state shares were invented in the early 1990s by the State Council in order to limit the ability of restructuring state-owned enterprises (SOEs) to sell their shares to private investors. Many SOEs at this time, under the control of provincial and sub-provincial governments, were attempting to sell large equity stakes to outside investors, a process that, left unhindered, would likely have led to large-scale and rapid privatization. As a result of the State Council decision, any large SOE that restructured into a shareholding firm was instructed to issue roughly equal amounts of LP, state and individual shares. These firms became, in effect, ‘one-third privatized’ (the exact breakdown between share types was left to the enterprise and its local regulatory bureau). An introduction to China's share market is provided in Green (2003). 2 Other back-door listings include China Merchants (buying Union Bank of Hong Kong) and Guangdong Enterprises (buying Union Global Development). 3 A company is deemed to be China-controlled company, if

(1) The company has at least 35% shareholding held in aggregate directly by Mainland China entities, and/or through companies which are controlled by Mainland China entities. Or (2) The company has below 35% but 20% or above shareholding held in aggregate directly by Mainland China entities, and/or through companies which are controlled by Mainland China entities and, there is a strong influential presence, on a judgmental basis, on the company's board of directors. Mainland China entities include state-owned organizations, provincial or municipal authorities in Mainland China (HKEx, Fact Book, 2002). 4 Wei et al. (2003) finds that the large portion of non-tradable shares distorts the information discovery function of stock price, and it also pushes up the volatility of stock prices.

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Table 1 Comparison of H-shares & Red Chips, all A-share Companies and Hong Kong (HK) Companies Panel A: Size This panel shows sales revenue for the fiscal year 2003. Data for H-share and red chip are obtained from Reuters, data for A-shares are from Genius, and data for the remaining Hong Kong firms are from Datastream. Unit (in million RMB yuan) Type

Mean

First quartile

Median

Third quartile

Standard deviation

No. of observations

H-share Red chip A-share HK

12568 7783 1671 2131

859 352 139 63

2758 1302 501 297

8066 2630 1271 1091

42,183 23,462 11,941 17,931

58 65 1291 781

Panel B: Turnover ratio (in percentage) This section shows median turnover ratio from 1999 to 2003. Median turnover ratio is median value of turnover ratio in respective group. Turnover ratio for individual firms is calculated as total shares traded during the year divided by average number of tradable shares. Data of H-share, red chip and HK firms are obtained from Datastream. Data of A-share firms are obtained from “Almanac of China's Finance and Banking, 2004”. Year

H-share

Red chip

A-share

HK

1999 2000 2001 2002 2003 Average of 1999–2003

229.9 208.3 313.2 111.7 212.1 215.0

119.2 80.3 94.9 40.5 69.9 81.0

448.0 501.0 248.6 206.4 232.5 327.3

24.9 28.2 16.8 20.1 32.0 24.4

Panel C: Valuation and profitability This panel shows median value of ROE, ROA, PE and PB for each year. ROE is net income divided by total owners' equity. ROA is net income divided by total assets. PE is price per share divided by earnings per share at the end of each year. PB is price per share divided by book value per share at the end of each year. Price per share data is obtained from Datastream. Number of shares data for A-share firms are obtained from CSMAR, complemented by Datastream. Number of shares data for the other three samples are obtained from Datastream. ROE and ROA of H-share and red chip are calculated based on data from Reuters. ROE and ROA of A sample are calculated based on data from Genius. ROE and ROA for HK firms are obtained from Datastream. PE ratio for A-shares is obtained from “Almanac of China's Finance and Banking, 2004.” PE ratio for Hong Kong companies is obtained from “HKEx Fact Book.” H-share

Red chip

A-share

HK

ROE (%) 1999 2000 2001 2002 2003 Average 1999–2003

5.6 7.1 6.0 7.3 7.2 6.6

8.4 7.1 8.8 13.1 15.3 10.5

Red chip

A-share

HK

ROA (%) 4.9 4.3 5.3 6.8 7.0 5.7

10.3 8.1 6.3 5.8 4.4 7.0

3.2 5.4 2.6 1.8 2.6 3.1

PE 1999 2000 2001 2002 2003 Average 1999–2003

H-share

3.9 4.6 3.7 4.9 4.1 4.2

1.9 1.8 2.4 3.9 3.6 2.7

5.2 4.4 3.2 2.4 1.8 3.4

2.2 3.3 2.2 1.3 1.8 2.2

0.8 0.8 0.9 0.8 1.3 0.9

11.9 16.9 11.7 8.5 6.8 11.2

0.7 0.7 0.8 0.7 1.0 0.8

PB 7.9 8.1 7.1 8.5 11.8 8.7

37.8 57.1 38.6 35.7 36.4 41.1

26.7 12.8 12.2 14.9 19.0 17.1

0.4 0.4 0.7 0.9 1.4 0.8

According to panel A of Table 1, the median size of Hong Kong's local companies, measured by sales in 2003, is smaller than that of A-share companies. Moreover, A-share companies are smaller than H-share and red chip companies. Panel B shows that A-share companies have the highest turnover ratio. Panel C shows that A-share companies have better accounting profitability and higher PE, PB ratios than the three groups listed in Hong Kong.

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2.3. Corporate governance in Hong Kong and in the Mainland Legal protection in Hong Kong is considered relatively strong (LLSV, 2002). Moreover, the overall infrastructure in this market is conductive to achieving international governance standards (Dallas, 2002). As evidence of Hong Kong's corporate governance sovereignty, CLSA (2002) ranks it number two in the annual Asian corporate governance ranking. Different from the common law system of Hong Kong, Mainland China basically follows the code-law system, which provides relatively poorer protection for outside shareholders (LLSV, 2000). Moreover, intermediary institutions necessary for an effective governance system to work are also lacking on the Mainland. The financial information industry, for example, is significantly constrained by the state's control of all information. As evidence of the poorer corporate governance on the Mainland, CLSA (2002) ranks Mainland China number sixteen out of twenty-three in its annual Asian corporate governance ranking. During the past several years, Chinese government has made great strides toward building an efficient governance system by issuing a vast number of regulations.5 As a result, the regulatory system in the Mainland is improving at a fast pace, with some requirements even stricter than those in Hong Kong (World Bank, 2002; CLSA, 2002). These regulations underscore both the severity of the governance problems on the Mainland and the Chinese authorities' determination to protect minority shareholders (Tenev, Zhang, & Brefort, 2002). 3. Hypothesis development Dividend payout decisions are central to firms' financial policies. Typically, the CFO or Treasurer forms a dividend recommendation that is passed along to the CEO for approval. The recommendation that emerges from the CEO's office is presented to the board of directors, usually for quick approval (Brav, Graham, Harvey, & Michaely, 2003). In this process, top executives and board members play critical roles in payout decisions.6 Given the concentrated ownership of HK- and Mainland-listed firms, the representatives of controlling shareholders should also exert significant influence on dividend policy through the board. This section discusses the relative incentives of management and controlling shareholders in payout decisions. 3.1. Incentives of management in dividend payout “Agency problem” refers to the conflict of interest between corporate insiders (such as managers and controlling shareholders) and outsiders (such as minority shareholders) (Berle and Means, 1932; Jensen and Meckling, 1976). The insiders who control corporate assets can use these assets for a range of purposes that are detrimental to the interests of outside investors. Agency theories state that dividend policies can be used to alleviate the agency problems between managers and shareholders (Easterbrook, 1984; Jensen, 1986). These theories suggest that, unless profits are paid out to shareholders, they may be diverted by the managers for personal use or committed to unprofitable projects that provide private benefits for the insiders. At the same time, board structure also plays some role in the agency problem. A typical board of Chinese firms listed on the Mainland and Hong Kong consists of representatives of dominant shareholders,7 managers and outside directors.8 I hypothesize that the percentage of executives who serve on the board is a measure of the management's

5

There are more than 300 laws, regulations, rules, standards, and guidelines concerning the securities and futures market (CSRC, 2001). Government regulations may also affect dividend policies. For example, on the Mainland, a rule was announced on Mar 28, 2001 requiring a continuous over three years cash dividend as a condition for rights offering approval and seasoned equity offering. Since regulations are exogenous to a specific firm's dividend policy, this section will not discuss it. 7 According to a survey of Mainland-listed companies, the largest shareholder accounts for slightly less than 50% of all shares but controls more than 50% of board seats (Tenev et al., 2002). 8 There are also representatives of the second or the third largest shareholder, but the number of board seat is less than the number belonging to the largest shareholder's, due to the lower shareholding. 6

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influence on the board. Firms with more managerial membership are more likely to suffer from the agency problem, thus are more likely to be associated with lower dividend payouts. This problem may be particularly acute for Mainland-listed firms due to the following two reasons. First, shareholding of managers in Mainland-listed firms is very low.9 In a more mature market, managerial stock ownership could result in higher dividend payouts by better aligning the interest of management and shareholders (Fenn and Liang, 2001). Lacking such a mechanism, managers have incentives to use the free cash for perquisites and empire building, rather than distributing dividends (Jensen and Meckling, 1976; Jensen, 1986; Jensen, 1989). Second, managers have a less incentive to pay dividends than their peers in HK-listed firms given the China-specific evaluation system, which emphasizes total profits and taxes paid (Tenev, 2002).10 Under such a system, managers have pressure to invest as much as possible to increase asset base, and consequently, total profits and taxes. Dividend distribution is inconsistent with this consideration by increasing financial constraints. However, the issue is not specific to Mainland-listed firms, the agency problem also exists in HK-listed firms, since managers still have little residual claim to the firm's income stream;11 that is, compared to perquisites or empire building, they benefit less from dividend distributions. Nevertheless, the negative association between managerial membership and dividend payouts may be weaker in HK-listed firms than that of Mainland-listed firms due to the following two reasons. First, HK-listed firms' managers have higher shareholding than those of Mainland-listed firms,12 hence the management's interest is more consistent with that of shareholders. Second, Zhang (2005) also shows that the correlation between compensation and market performance is significantly positive for HK-listed firms, but insignificant for Mainland-listed firms. This further indicates that managers' interest is more consistent with shareholders for HK-listed firms. As a whole, managerial membership on the board is associated with lower dividend payouts in both groups of Chinese firms. However, as analyzed above, managerial ownership and compensation schemes based on market performance mitigate agency problems in Hong Kong. Therefore, dividend payouts of HK-listed firms will be relatively less sensitive to managerial membership on the board compared to that of Mainland-listed firms. Then the hypotheses are as follows (in alternative form): H1. Managerial membership on the board is negatively associated with dividend payout in both groups of Chinese firms. H2. The negative association between managerial membership on the board and dividend payout is stronger for the Mainland-listed firms than for the HK-listed firms. 3.2. Incentives of controlling shareholders in dividend payout Easterbrook (1984), Jensen (1986) and others suggest that shareholders can minimize the cash that management controls, and thereby reduce the opportunity for management to waste resources for lack of monitoring. One way to take excess cash from the firm is to increase cash dividend payouts. Thus, the rate of dividends may be related to the need to control and monitor managers (Brav et al., 2003). Controlling shareholders of Mainland-listed firms may have stronger incentive to monitor dividend policy than their peers of HK-listed firms due to the poorer legal protection in the Mainland. The relatively passive minority shareholders in the Mainland make majority shareholders' monitoring necessary. Outside shareholders have less chance to exercise their rights to monitor managers. For example, shareholders' meetings are supposed to be a corporation's most powerful authority; however, Chinese laws and regulations do not 9

The top three senior managers hold, on average, 4.00, 4.75 and 0.03% of total shares for H-share, red chip and matched A-share firms respectively. 10 Given the lack of strong incentives based on share performance, managers of Chinese listed firms are particularly sensitive to their performance assessment by their superiors in the political and administrative hierarchy. In many cases the government still evaluates companies based on their total profits and taxes paid (Tenev et al., 2002). 11 Irrespective of listing in the Mainland or in Hong Kong, it is the majority shareholders, not managers, who have the largest shareholding in Chinese firms. Based on Table 2, average shareholding of the largest shareholder in HK- vs. Mainland listed firms is 53% (median = 55%) vs. 49% (median = 50%). 12 The top three senior managers hold, on average, 4.00, 4.75 and 0.03% of total shares for H-share, red chip and matched A-share firms respectively.

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specify shareholders' rights clearly (Tenev et al., 2002). Thus, it is not surprising that minority shareholders seldom have the chance to attend the shareholders' meeting, nor can they exert control over manager behavior. In contrast, the more active role taken by minority shareholders in Hong Kong makes the monitoring by large shareholders less significant. A typical example is PCCW, where minority shareholders boldly challenged the company top management on issues ranging from director remuneration to the failure to deliver promised promotional gifts to customers in the general meeting (South China Morning Post, May 24, 2005). Similarly, minority shareholders may challenge the company for not paying dividends. Thus, one expects that controlling shareholders of Mainland-listed firms have stronger incentives to force managers to disgorge cash than HK-listed firms. This role of controlling shareholders tends to weaken the negative association between managerial membership and dividend payouts. For HK-listed firms, shareholders do not have the same incentive. Therefore ownership structure will have a smaller effect on the relation between managerial membership and dividend policy. Hence the following hypothesis (in alternative form): H3. Ownership concentration in Mainland-listed firms is more likely than concentration in HK-listed firms to weaken the negative association between managerial membership on the board and dividend payout. 3.3. Cash dividends and valuation Agency theories predict that dividend is associated with price premium because a higher dividend rate reduces managers' tendency to waste free cash (Dewenter and Warther, 1998). If a market is efficient in reflecting the benefit of reduced agency costs, a higher dividend payout should be associated with a higher price premium. Hence the following hypothesis (in null form): H4. The dividend payout is associated with price premium in the Hong Kong market as well as in the Mainland market. However, prior research suggests that Mainland markets may not be efficient in reflecting all relevant information. Morck, Yeung, B., & Yu (2000) find that stock prices of firms listed in the Mainland are more synchronous than those of firms listed in Hong Kong. My further studies also suggest that stock prices of Mainland-listed firms tend to reflect less firm-specific information than the prices of matched HK-listed firms.13 I hypothesize that stock prices in the Mainland are less likely to move as a response to dividend payouts. Therefore, financial markets in the Mainland may be less efficient in terms of reflecting the benefits of dividend payouts. Thus, the dividend rate of HK-listed firms should be more strongly associated with positive valuation than that of Mainland-listed firms. This leads to the following hypothesis (in alternative form): H5. The association between dividend payout and price premium is stronger in the HK-listed firms than in the Mainland-listed firms. 4. Methodology and data description 4.1. Methodology 4.1.1. Corporate governance and dividend policy To test H1 and H2, I regress payout ratio on board structure, as well as other control variables using the following equation: Div=Earn ¼ g0 þ g1 Board þ g2 ROE þ g3 Salesgrowth þ g4 Size þ g5 Ext X fin þ g6 Cash X rev þ g7 Debt=Totalassets þ g8 Prev þ Fixedeffects þ u

13

ð1Þ

Preliminary analysis shows that stock prices of HK-listed firms are more associated with future earnings and future capital investment than those of Mainland-listed firms.

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where, Div/Earn is dividend/earnings ratio, dividend is net of tax cash dividend paid during a fiscal year; earnings are of after taxes and interest, namely, net income. I choose Div/Earn since dividend policy usually builds a direct association between earnings and distribution (Brav et al., 2003).14 Board is a serious of board structure variables reflecting the managerial membership. I choose the fraction of directors who are managers of listed companies (Magt) to measure the managers' influence in the board. In addition, the combined title of CEO and board chair (CMB) is another variable to measure the top executives' influence in the board. Consistent with these variable selections, the fraction of managers on the board and combined title of board Chair and CEO are important aspects adopted by Standard and Poor's15 and CLSA16 (2002) to measure a firm's corporate governance level. Based on Fama and French (2001), I include a profitability measure (ROE), investment opportunities (Salesgrowth) and Size as control variables. ROE is return on owners' equity, computed as net income over owners' equity; Salesgrowth of t = (sales of year t − sales of year t − 1)/ sales of year t − 1; Size is natural log of total sales. Following Durnev and Kim (2003), Ext_fin is included to control for the firm's need for capital. Ext_fin is external financial qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi h  i Totalassetst ROEt ROEt1 needs, computed from the equation Ext X fin ¼ Totalassets  þ 1ROEt 1ROEt1 =2 . Similarly, Cash_rev is t1 included to reflect the needs for cash. Cash_rev is cash balance at the end of fiscal year scaled by sales of the year. In addition, Debt/Totalassets is included to reflect debt holders' restriction on payout policy. Prev is included to control for a firm's intention to follow a fixed payment pattern. Finally, Fixedeffects is a set of year control variables. To test H3, I include an interaction term between Board and high ownership concentration dummy (H_own_cctrl) in Eq. (1), hence the following equation: Div=Earn ¼ g0 þ g1 Board þ g2 Board4 H own cctrl þ g3 H own cctrl þ g4 ROE þ g5 Salesgrowth þ g6 Size þ g7 Ext finþg8 Cash rev þ g9 Debt=Totalassets þ g10 Prev þ Fixedeffectsþu

ð2Þ

where H_own_cctrl is a dummy variable equal to one if the ownership concentration (Own_cctrl) is over one-third in the respective group.17 Following previous literature, Own_cctrl is measured as shareholding of the largest shareholder (Lee and Xiao, 2004; Wei, G., Zhang, W.G., & Xiao, 2003). 4.1.2. Cash dividends and valuation Following Baker and Wurgler (2004), market-to-book ratio (Tobin's Q) is chosen as a measure of firm valuation. One needs to adjust the equation to compute Tobin's Q since market value is related to tradable shares only, but book value is about the whole company. To match market value with its corresponding book value, owners' equity is adjusted through multiplying by the portion of tradable shares. That is, Tobin's Q = [(market value + total liabilities) / (owners' equity × ratio of tradable shares over total shares + total liabilities)], where, market value is the number of tradable shares multiplied by price per share at the end of month subsequent to dividend announcement. Previous studies use size, leverage, growth in sales, profitability and listing age as economic determinants of Tobin's Q (Demsetz and Lehn, 1985; Morck, Shleifer, and Vishny, 1988; LLSV, 2002). Thus the following equation is used to examine the relation between cash dividend payout and valuation: Q ¼ d0 þ d1 Div=Earn þ d2 Size þ d3 Salesgrowth þ d4 ROE þ d5 Debt=Totalassets þ d6 Age þ Fixedeffects þ u ð3Þ where Q is Tobin's Q. Age is the number of years between listing date and December 31, 2003. 14 Dividend per share is not used since par values in Hong Kong vary significantly across firms, ranging from HK$0.01 to HK$1. Dividend yield is not suitable due to its negative association with valuation. 15 The board structure criteria adopted by Standard and Poor's includes the list of board members, details about directors, details about Chairmen, etc. 16 Aspects III (Independence) and IV (accountability) of CLSA's corporate governance measures include related measures as follows: Chairman who is independent from management; Board plays a supervisory rather than executive role, etc. 17 I choose dummy variables to avoid multicollinearity problems.

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4.2. Data sources and descriptive results 4.2.1. Sample selection As of January 2004, there are 88 H-share and 72 red chip firms listed in Hong Kong. Excluding firms with missing board structure data 2003, I obtain a sample of 123 firms. Since one objective of this study is to compare the governance of HK- and Mainland-listed firms, I choose 123 industry- and size-controlled A-share companies from the 1200 firms listed in Shanghai and Shenzhen stock markets as a matching sample. Industry is a criterion due to its close relation with government regulation. Size is chosen as another criterion since previous literature points out that size is an important factor affecting governance system (Core, Holthausen, & Larcker, 1999). Detailed process of matching is as follows: with regard to each of the 123 H-share and red chip firms, I obtain the industry type from Datastream first. Then, all domestic firms within the same industry based on the industry classification proposed by CSRC are chosen.18 Finally, I select the A-share firm whose size for the year 2003 is most close to that of the H-share and red chip firm. Repeating the process 123 times, I construct a controlled A-share sample with related to the 123 H-share and red chip firms. 4.2.2. Data sources Board structure and ownership data are hand-collected based on annual report. Dividend data and financial data of HK-listed firms come from Reuters. This database provides dividends by type, I sum up the three types (Final, Interim and Special type) as the overall dividend paid in a fiscal year.19 Dividend data and financial data of A-share companies are obtained from Genius.20 Stock price data for both HK- and Mainland-listed firms are obtained from Datastream. 4.2.3. Data description Table 2 presents the descriptive statistics of the board structure and ownership characteristics. According to this table, HKlisted firms have a board with more managerial influence than that of the matched Mainland-listed firms. As to CMB, 17% of HK-listed firms combine the CEO and board chair into one, while this frequency for matched Mainland-listed firms is only 12%. The fraction of managers on the board (Magt) is 0.25 for HK-listed firms, while it is 0.22 for Mainland-listed firms. Table 2 also shows that HK-listed firms tend to have higher ownership concentration (Own_cctrl) (median = 0.55) than their peers listed in the Mainland (median = 0.50). Nevertheless, both groups are characterized by highly concentrated ownership. Since the largest shareholders of most Chinese firms are either government agencies or stateowned enterprises (SOE),21 the high concentration of ownership indicates that Chinese government is reluctant to forgo control. In particular, the concentrated ownership by government or SOEs is likely the result of the listing approval process: the regulators tend to give preference to companies that were under governmental control. Due to the evolvement of market and the development of regulatory system, the board structure of Mainland-listed firms sees improvement during the past several years. Figs. 1 and 2 show the trend of these two groups. As indicated in Fig. 1, the prevalence of combined title of CEO and board chair (CMB) of HK-listed firms fluctuate around 0.17. Nevertheless, the cases of combined position of Mainland-listed firms go down during the same period. Fig. 2 compares the trend of the fraction of managers on the board (Magt). Also, it shows that there is a downward trend for the Mainland-listed firms, not for HK-listed firms. Regulatory difference can partly explain the discrepancy\Mainland authorities have issued several regulations stressing the independence of the board since 1998, while regulations in Hong Kong have been relatively stable during this period. Fig. 3 shows that Own_cctrl is relatively stable for HK-listed firms, while there is a downward trend for Mainlandlisted firms. The difference is partially due to the different rights—issuing activities in Hong Kong and the Mainland. Mainland-listed firms undergo more rights issues than the firms listed in Hong Kong, and the largest shareholder usually forgoes the rights to purchase additional shares.22 18 China Securities Regulatory Commission (CSRC) has classified all firms listed in the Mainland into 13 industries, such as agriculture, mining, manufacturing, etc. 19 It is unnecessary to consider tax effect, since dividend is free of tax in Hong Kong. 20 A-share company cash dividend is the sum of gross dividend and the tax payable for stock dividend. Both cash dividend and stock dividend are subject to a 20% tax rate, so I obtain net dividend by the equation: net cash dividend = [cash dividend ⁎(1 - 20%) - stock dividend ⁎ 20%]. 21 The controlling shareholder's identities are similar for these two groups—around 10% of Chinese firms listed in Hong Kong and Mainland are controlled by government agencies, around 80% of these two groups are controlled by SOEs. 22 Lee and Xiao (2004) show that, on average, the controlling shareholders of Mainland-listed firms only subscribe 29% of the shares allocated to them in rights offerings whereas minority shareholders subscribe 100%.

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Table 2 Descriptive statistics of ownership concentration and board structure H&R Mean

Matched A Median

Standard deviation

Test for difference

N

Mean

Median

Standard deviation

N

Ownership concentration (Own_cctrl) 1999 0.54 0.55 0.12 2000 0.54 0.55 0.13 2001 0.52 0.54 0.15 2002 0.52 0.55 0.15 2003 0.52 0.54 0.15 Pooling 0.53 0.55 0.14

96 112 120 123 122 573

0.50 0.49 0.49 0.48 0.47 0.49

0.52 0.51 0.50 0.49 0.49 0.50

0.20 0.20 0.20 0.19 0.19 0.19

123 123 123 123 123 615

1.15 1.78 1.09 1.43 1.89⁎ 3.26⁎⁎

CEO/Chair duality (CMB) 1999 0.19 0 2000 0.15 0 2001 0.15 0 2002 0.19 0 2003 0.16 0 Pooling 0.17 0

123 123 123 123 123 615

0.15 0.12 0.12 0.11 0.09 0.12

0 0 0 0 0 0

0.35 0.33 0.33 0.32 0.29 0.32

123 123 123 123 123 615

0.73 0.32 0.55 2.58 2.99 5.97⁎⁎

94 111 120 123 123 571

0.27 0.26 0.24 0.20 0.19 0.23

0.27 0.22 0.22 0.18 0.18 0.22

0.17 0.18 0.16 0.14 0.14 0.16

123 123 122 123 123 614

−0.38 0.95 1.51 3.09⁎⁎ 3.17⁎⁎ 3.91⁎⁎

0.39 0.35 0.36 0.39 0.37 0.37

The fraction of management on the board (Magt) 1999 0.28 0.26 0.17 2000 0.26 0.27 0.14 2001 0.26 0.27 0.15 2002 0.26 0.27 0.15 2003 0.25 0.22 0.15 Pooling 0.26 0.25 0.15

This table shows summary statistics of board structure and ownership concentration. H&R denotes HK-listed Chinese firms. Control A denotes industry- and size-controlled Mainland-listed firms. The sample consists of 123 HK-listed firms and 123 matched Mainland-listed firms between 1999 and 2003. Ownership concentration (Own_cctrl) is shareholding of the largest shareholder. CEO/Chair duality (CMB) is an indicator variable equal to one if the position of CEO and board Chair are combined into one. The fraction of managers on the board (Magt) indicates the fraction of directors who are senior management of the listed companies. N is the number of observations. Information on HK-listed firms is obtained from annual report. Information on matched Mainland-listed firms comes from CSMAR. Test for difference in CMB is a Chi-square frequency test, Chisquare statistic is reported. The remaining test for difference is the Wilcoxon rank-sum test, Z-value is reported. ⁎⁎ and ⁎ denote statistically significantly different at the 1% level and 5% level respectively.

Table 3 provides summary statistics about HK-listed firms vs. Mainland-listed firms. This table shows that HK-listed firms' payout ratio23 is lower (median = 0.16) than Mainland-listed ones (median = 0.20).24 HK-listed firms' Tobin's Q is also lower (median = 0.97) than matched ones (median = 3.19), consistent with the pattern of PE, PB from Table 1. With respect to financial characteristics, median Cash_rev of HK- and Mainland-listed firms are 0.39 and 0.30 respectively, with HK-listed firms having higher cash balance. Finally, HK-listed firms are slightly older than Mainland-listed ones. 5. Empirical results 5.1. Regression analysis 5.1.1. Board structure and cash dividends Table 4 reports the results of Tobit analysis examining the relation between board structure and dividend rate.25 According to Column 1, CMB has no significant association with dividend payout for HK-listed Chinese firms. Column 2 shows that the coefficient of Mainland-listed firms is significantly negative. Moreover, the coefficient of CMB is significantly different between the two groups of Chinese firms, indicating that a more influential CEO in 23

To overcome the extreme values, I winsorize dividend payout ratio to the range of [- 20, 20]. There are 3 outliers of HK-listed firms, 7 outliers of Mainland-listed firms. Moreover, there are 4 negative observations in HK-listed firms, and 1 negative observation in Mainland-listed firms. 24 See Appendix A about the trend for the portion of payers, and Appendix B about the trend for dividend payout ratio of payers. 25 I obtain similar results for Tables 4–6 once I use the OLS with standard errors adjusted for both heteroskedasticity and within correlation clustered by firm.

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Fig. 1. The trend of CEO/Chair duality. Sample “H&R” refers to 65 H-share and 58 red chip companies. Sample “A” indicates 123 industry- and sizecontrolled A-share companies “H&R” refers to HK-listed firms, and “A” refers to matched Mainland-listed firms.

Mainland-listed firms is more likely to pay lower cash dividends. Column 3 and 4 report that the pattern exists after controlling for the impact of dominant shareholder (Own_cctrl). As a whole, evidence about CMB is consistent with H2. Column 5 and 6 report the results of Tobit analysis examining the relation between the fraction of managers on the board (Magt) and dividend rate. Magt of both groups of Chinese firms is conducive to lower cash dividends, and the coefficients are not significantly different. Columns 7 and 8 show that the results are valid after controlling for Own_cctrl. In sum, these findings indicate that managerial influence on the board of Mainland- as well as HK-listed firms is associated with lower dividends, consistent with H1. Ext_fin is significantly negative in HK-listed firms, but not significant in Mainland-listed ones. This indicates that HK-listed firms needing more external capital tend to distribute lower cash dividends, while this need doesn't affect Mainland-listed firms' dividend policy. On the other hand, cash balance (Cash_rev) is significantly positive in the Mainland-listed firms, but not significant in the HK-listed ones. This reflects the fact that Mainland-listed firms distribute more when they have more cash on hand, while distribution of HK-listed firms is irrelevant to cash holding. Debt/Totalassets is significantly positive in HK-listed firms, but negative in Mainland-listed ones. This indicates that debt holders of HK-listed firms have not restricted dividend distribution, which is consistent with the result that debt loads of HK-listed firms (median = 0.38) are not as heavy as that of the Mainland-listed firms (median = 0.46). Finally, HK-listed firms follow a more consistent dividend policy, as indicated by the significantly higher coefficient of previous payout variable (Prev). 5.1.2. The impact of ownership concentration Table 5 reports the impact of ownership concentration on the relation between board structure and dividend rate. According to Column 2, a high ownership concentration dummy (H_own_cctrl) in Mainland-listed firms has no significant impact on the association between CMB and dividend rate. It seems that controlling shareholders' influence plays no significant role in reducing the agency cost associated with CMB.26 Column 3 shows that H_own_cctrl of HK-listed firms has no significant effect on the free cash flow problem. However, Column 4 indicates that the coefficient of interaction term between Magt and H_own_cctrl is significantly 26

I neglect the results about HK-listed firms (Column 1) since there is no evidence of agency cost associated with combined title of CEO and board chair (CMB).

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Fig. 2. The trend of the fraction of managers on the board. Sample “H&R” refers to 65 H-share and 58 red chip companies. Sample “A” indicates 123 industry- and size-controlled A-share companies.

positive in Mainland-listed firms, suggesting that concentrated ownership in Mainland-listed firms seems to reduce the agency cost of withholding dividends. Overall, the findings are consistent with H3.27 Since controlling shareholders' monitoring intentions result in higher dividend payments, the relatively “passive” role of controlling shareholders in HK-listed firms may be associated with a lower dividend payout in Hong Kong. On the other hand, the weaker relation between managerial membership and dividend rates in Hong Kong is expected to be associated with higher dividend payouts than those of the Mainland. Hence, the relative magnitude of dividend rates in Hong Kong and the Mainland is uncertain. I examine this issue using the following equation: Div=Earn ¼ g0 þ g1 HK þ g2 ROE þ g3 Salesgrowth þ g4 Size þ g5 Ext X fin þ g6 Cash X rev þ g7 Debt=Totalassets þ g8 Prev þ Fixedeffects þ u

ð4Þ

where HK is a dummy variable equal to one if the firm is of HK-listed. To explore the impact of other unidentified factors, I control corporate governance variables and conduct the same test. Table 6 reports the results. Table 6 shows that the coefficient for HK is not significant, implying that there is no significant difference between dividend rates (hence, agency cost) of two groups of firms. This finding implies that neither the controlling shareholders' less active role nor the management's less influential impact is dominant enough to cause a significant gap between dividend rates of HK- and Mainland-listed firms. However, one may explain this result with caution since taxes related to dividends are different across two markets \ dividend is tax free in Hong Kong, but subject to 20% tax in the Mainland. Managers in the Mainland may distribute more if there is no tax associated with dividends. 5.1.3. Cash dividends and valuation Table 7 reports the valuation effects of dividend payout. Column 1 shows the results of HK-listed Chinese firms and Column 2 Mainland-listed firms. According to this table, dividend payout ratio (Div/Earn) in Hong Kong is associated with price premium, while Div/Earn of matched Mainland firms is irrelevant to valuation, and coefficients of two groups differ significantly at the 10% level. These results are not consistent with H4, but consistent with H5.

27

Results here are also consistent with Grossman and Hart (1980)'s point that concentrated ownership is necessary to circumvent the free-rider problem in monitoring management.

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Fig. 3. The trend of the ownership concentration. Sample “H&R” refers to 65 H-share and 58 red chip companies. Sample “A” indicates 123 industryand size-controlled A-share companies.

As to other economic determinants, column 1 indicates that only ROE conduces to higher valuation in HK-listed firms. On the other hand, Size and Debt/Totalassets are significant for the Mainland-listed firms: larger firms with more debt load are associated with lower valuation. Columns 3 shows results about industry- and size-controlled local firms listed in Hong Kong. Based on Column 3, the coefficient on Div/Earn is significantly positive, consistent with the results from HK-listed Chinese firms. These findings imply that Hong Kong's market provides a mechanism encouraging dividend payments. Table 3 Descriptive statistics of dividend payout and related financial characteristics H&R

Div/Earn Q Debt/Totalassets Size Salesgrowth, t ROE Age Prev Cash_rev Ext_fin

Matched A

Mean

Median

Standard deviation

N

Mean

Median

Standard deviation

N

0.35 1.73 0.58 11.76 0.25 0.06 9.44 0.52 1.19 1.43

0.16 0.97 0.38 11.79 0.12 0.06 7.01 1.00 0.39 0.99

2.02 3.88 3.20 1.91 1.05 0.99 7.26 0.50 3.69 5.95

563 549 606 613 603 606 615 547 573 584

0.48 4.01 0.46 11.75 0.20 0.06 6.81 0.57 0.49 0.98

0.20 3.19 0.46 11.65 0.14 0.08 6.02 1.00 0.30 0.97

2.13 3.04 0.20 1.10 0.63 0.17 2.24 0.50 0.72 0.15

615 610 610 602 602 610 610 614 615 610

This table shows summary statistics of dividend payout and related financial characteristics for the 123 HK-listed Chinese firms and 123 matched Mainland-listed firms from 1999 to 2003. Dividend is total cash dividends paid during the fiscal year (net of tax). Div/Earn is dividend/earnings ratio, where earnings are net income. To overcome the extreme values, I winsorize it to the range of [− 20, 20]. There are 3 outliers of dividend payout ratios of HK-listed firms, 7 outliers of Mainland-listed firms. Q is Tobin's Q, = [(market value + book value of total liabilities) / (book value of owners' equity × ratio of tradable shares over total shares + book value of total liabilities)], where, market value is number of tradable shares times price per share at the end of month subsequent to Final type dividend announcement. Size is natural log of total sales (unit is RMB¥0000). Salesgrowth for t = (sales for year t − sales for year t − 1) / sales for year t − 1. ROE is net income divided by owner's equity. To overcome the extreme values, I winsorize the Salesgrowth and ROE to the range of [− 20, 20]. Age is the number of years between listing date and December 31, 2003. Prev is a dummy variable equal 1 if the firm has paid cash dividends during year t − 1. Cash_rev is cash balance at the end of year t divided by sales revenue for the year qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi h  i Totalassetst ROEt t1 t − 1. Ext_fin is external financial needs, computed as the equation Ext X fin ¼ Totalassets þ ROE  1ROE ROEt1 =2 . N is the number of t1 t observations. Data for HK-listed firms are obtained from Reuters, data for matched Mainland-listed firms are obtained from Genius.

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Table 4 Tobit analyses of dividend rates on board structure H&R

Matched A

H&R

Matched A

H&R

Matched A

H&R

Matched A

Independent variables

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

CMB

0.434 a (1.40)

−0.211⁎⁎ (−2.86)

0.415 a (1.33)

− 0.181⁎⁎ (− 2.43)

−0.364⁎⁎ (− 2.54)

1.401⁎⁎ (4.48) −0.040 (−1.00) 0.048 (1.88) 0.197 (1.16) 0.081⁎ (2.19) −0.497⁎⁎ (−3.91) 0.267⁎⁎ (5.30) .136 596

0.646 (0.72) 0.444 a (1.70) − 0.023 (− 0.17) 0.153 (1.79) − 0.135⁎a (− 2.42) 0.042 a (0.87) 1.629⁎⁎a (3.46) 2.818⁎⁎a (9.77) .108 515

0.247⁎ (2.00) 1.327⁎⁎ (4.32) − 0.040 (− 0.99) 0.037 (1.43) 0.216 (1.28) 0.079⁎ (2.15) − 0.430⁎⁎ (− 3.31) 0.270⁎⁎ (5.38) .140 596

−1.687⁎ (−2.03)

0.453 a (1.76) −0.043 (−0.32) 0.213⁎⁎ (2.54) −0.128⁎a (−2.33) 0.044 a (0.94) 1.691⁎⁎a (3.62) 2.742⁎⁎a (9.57) .110 513

1.436⁎⁎ (4.55) −0.042 (− 1.04) 0.046 (1.80) 0.194 (1.14) 0.090⁎ (2.41) −0.513⁎⁎ (− 4.02) 0.281⁎⁎ (5.57) .134 595

− 1.641⁎ (− 1.95) 0.381 (0.42) 0.449 a (1.73) − 0.040 (− 0.30) 0.204⁎ (2.32) − 0.129⁎a (− 2.35) 0.042 a (0.88) 1.683⁎⁎a (3.60) 2.742⁎⁎a (9.55) .110 512

− 0.410⁎⁎ (− 2.87) 0.349⁎⁎ (2.87) 1.313⁎⁎ (4.29) − 0.041 (− 1.03) 0.031 (1.20) 0.224 (1.33) 0.088⁎ (2.39) − 0.423⁎⁎ (− 3.27) 0.281⁎⁎ (5.64) .142 595

Magt Own_cctr1 ROE Salesgrowth Size Ext_fin Cash_rev Debt/Totalassets Prev Pseudo-R2 Observations

0.340 a (1.44) − 0.026 (−0.19) 0.180⁎ (2.20) − 0.131⁎a (−2.35) 0.047 a (0.99) 1.526⁎⁎a (3.29) 2.842⁎⁎a (9.87) .108 521

This table reports the determinants of dividend payout ratio. The dependent variable is dividend payout ratio (Div/Earn). Independent variables are CMB, Magt, Own_cctr1, ROE, Salesgrowth, Size, Ext_fin, Cash_rev, Debt/Totalassets, and Prev. CMB is an indicator variable equal to one if the position of CEO and board chair are combined into one. Magt indicates the fraction of directors who are senior management of the listed companies. Own_cctr1 is shareholding of the largest shareholders. All the other variables are the same as Table 3. Constant terms and year dummies are included in analyses but not reported. The sample consists of 123 HK-listed Chinese firms, 123 matched Mainland-listed firms from 1999 to 2003. t-statistics (in parentheses) are based on Tobit analysis. ⁎⁎ and ⁎ denote statistically significantly different at the 1 and 5% level respectively. a Denotes coefficient in H&R regression is significantly different from that in matched A regression at p b 10%.

Columns 4 to 6 report the valuation of ownership concentration (Own_cctrl) for three groups of firms. They show that Own_cctrl is irrelevant to valuation in Hong Kong (HK-listed Chinese firms and local firms listed in Hong Kong) as well as in the Mainland (Mainland-listed firms). According to columns 7 to 10, the board structure variables CMB and Magt have no impact on valuation of HK- and Mainland-listed firms, either. 5.2. Robustness test 5.2.1. Selection bias test Under most cases, it is Chinese government who chooses firms to list on Hong Kong Stock Exchange. Even though the detailed selection process is not transparent, one possible concern is that Mainland authorities allow only firms with certain characteristics to list in Hong Kong. Thereafter, the results about HK-listed firms may be caused by these characteristics. And it could be these characteristics, rather than Hong Kong mechanisms, which leads to the difference in dividend behavior. To address the selection bias and endogeneity issues, I follow a similar research design as Leuz and Verrecchia (2000) and use a two stage Heckman (1979) estimation approach. In the first stage, I use Logit estimation to model the decision to list in Hong Kong. In the second stage, I estimate Eqs. (1) and (2) after controlling for the inverse Mills ratios computed using the first stage result.28

28

A complete description of this research methodology, including the computation of the inverse Mills ratio, can be found in Maddala (1983).

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Table 5 Tobit analyses of ownership concentration's impact on the association between dividend rates and board structure H&R

Matched A

H&R

Matched A

Independent variables

(1)

(2)

(3)

(4)

CMB

0.124 a (0.31) 0.716 (1.13)

− 0.177⁎ (− 2.14) − 0.082 (− 0.47)

0.177 (0.64) 0.343 a (1.44) − 0.019 (−0.14) 0.156⁎ (1.89) − 0.130⁎a (−2.35) 0.039 a (0.81) 1.465⁎⁎a (3.16) 2.828⁎⁎a (9.87) .110 522

0.108⁎ (2.19) 1.294⁎⁎ (4.20) − 0.039 (− 0.97) 0.042 (1.66) 0.193 (1.14) 0.079⁎ (2.16) − 0.470⁎⁎ (− 3.68) 0.262⁎⁎ (5.22) .141 596

− 2.007⁎ (−2.30) 1.047 (1.22) 0.177 (0.64) 0.453 a (1.75) − 0.041 (−0.30) 0.197⁎ (2.33) − 0.132⁎a (−2.40) 0.041 a (0.86) 1.653⁎⁎a (3.53) 2.755⁎⁎a (9.61) .111 513

− 0.581⁎⁎ (− 3.10) 0.422⁎ (1.99) 0.027⁎ (2.19) 1.314⁎⁎ (4.31) − 0.041 (− 1.02) 0.042 (1.70) 0.196 (1.17) 0.087⁎ (2.35) − 0.496⁎⁎ (− 3.98) 0.270⁎⁎ (5.39) .144 595

CMB ⁎ H_own_cctrl Magt Magt ⁎ H_own_cctr1 H_own_cctr1 ROE Salesgrowth Size Ext_fin Cash_rev Debt/Totalassets Prev Pseudo-R2 Observations

This table reports the impact of ownership concentration on the association between dividend rate and board structure. The dependent variable is dividend payout ratio (Div/Earn). Independent variables are CMB, Magt, interaction term between CMB and high ownership concentration dummy (H_own_cctrl), the interaction term between Magt and H_own_cctrl, H_own_cctrl, ROE, Salesgrowth, Size, Ext_fin, Cash_rev, Debt/Totalassets, and Prev. H_own_cctrl is a dummy variable equal to one if Own_cctr1 is of top one-third in respective group. Own_cctr1 is shareholding of the largest shareholders. All the other variables are the same with Table 4. Constant terms and year dummies are included in analyses but not reported. The sample consists of 123 HK-listed Chinese firms, 123 matched Mainland-listed firms from 1999 to 2003. t-statistics (in parentheses) are based on Tobit analysis. ⁎⁎ and ⁎ denote statistically significantly different at the 1 and 5% level respectively. a Denotes coefficient in H&R regression is significantly different from that in matched A regression at p b 10%.

In the Logit models, I introduce variables that proxy for Mainland authorities' criterion, including Size, Salesgrowth, ROE and Debt/Totalassets.29 Also Fixedeffects is included to control for year dummies. Thus, the equation for the first stage estimation is as follow: HK ¼ g0 þ g1 Size þ g2 Salesgrowth þ g3 ROE þ g4 Debt=Totalassets þ Fixedeffects þ u

ð5Þ

In the second stage, we use Eqs. (1) and (2) and control for the inverse Mills ratios computed from the first stage. Table 8 presents the empirical results of controlling for the selection bias. Panel A presents results of the first stage model, it reports that only coefficient for Debt/Totalassets is significant, and the model is significant at 10% level. Panels B to D report the second stage results. Results from Panels B, C and D are generally consistent with Tables 4, 5 and 7 respectively. Furthermore, the significance of the inverse Mills ratio (Inv. Mills Ratio) in Panels B and C indicates that it is important to control for selection bias.

29

Since I choose matched Mainland-listed firms in the same industry, it is unnecessary to include industry variable list.

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Table 6 Tobit analyses of relative dividend rate of two groups of firms Independent variables

(1)

(2)

(3)

(4)

HK

0.111 (0.96)

0.115 (1.00) 0.834⁎⁎ (2.53)

0.163 (1.40)

0.141 (1.20) 0.913⁎⁎ (2.77) 0.190 (1.20) − 0.981⁎⁎ (− 2.56) 0.625⁎⁎ (3.60) 0.009 (0.12) 0.109⁎⁎ (2.53) − 0.108⁎⁎ (− 2.80) 0.014 (0.45) 0.694⁎⁎ (4.88) 1.396⁎⁎ (11.59) .074 1107

Own_cctr1 CMB Magt ROE Salesgrowth Size Ext_fin Cash_rev Debt/Totalassets Prev Pseudo-R2 Observations

0.533⁎⁎ (3.30) 0.013 (0.17) 0.144⁎⁎ (3.39) − 0.108⁎⁎ (−2.75) 0.020 (0.65) 0.512⁎⁎ (4.74) 1.407⁎⁎ (11.66) .069 1117

0.632⁎⁎ (3.65) 0.011 (0.15) 0.108⁎⁎ (2.53) − 0.112⁎⁎ (− 2.88) 0.015 (0.50) 0.680⁎⁎ (6.30) 1.393⁎⁎ (11.56) .072 1111

0.126 (0.79) − 0.897⁎⁎ (− 2.34) 0.646⁎⁎ (3.73) 0.007 (0.10) 0.136⁎⁎ (3.20) − 0.106⁎⁎ (− 2.72) 0.018 (0.59) 0.608⁎⁎ (4.27) 1.401⁎⁎ (11.61) .072 1108

This table reports the results of comparing dividend payouts in Hong Kong and in the Mainland. The dependent variable is dividend payout ratio (Div/ Earn). Independent variables are HK, own_cctrl, CMB, Magt, ROE, Salesgrowth, Size, Ext_fin, Cash_rev, Debt/Totalassets, and Prev. HK is a dummy variable equal to one if the firm is listed in Hong Kong. All the other variables are the same with Table 7. Constant terms and year dummies are included in analyses but not reported. The sample is the pooling of 123 HK-listed Chinese firms and 123 matched Mainland-listed firms from 1999 to 2003. t-statistics (in parentheses) are based on Tobit analysis. ⁎⁎ and ⁎ denote statistically significantly different at the 1 and 5% level respectively.

5.2.2. Simultaneous equations test There is an endogeneity problem in the valuation analysis. In column (1) of Table 7, it is possible that firms with higher Tobin's Q tend to pay more cash dividends, rather than higher dividend payout, leading to a higher Q ratio. The causality problem is not that serious since valuation is measured in the month after dividend announcement. This concern is addressed by using a three-stage approach. Baum, C.F., Schaffer, M.E., & Stillman's (2003) generalized method of moments (GMM) estimation is also used to conduct a diagnostic test of the relevance and validity of instrument variables. In the three-stage least squares estimation, the dividend equation uses dividend payout ratio as dependent variable and Tobin's Q as a simultaneously determined variable. I use the same set of control variables used in Eq. (1) excluding Age and including Ext_fin. The valuation equation uses Tobin's Q as dependent variable and dividend payout ratio as a simultaneously determined variable. As to other variables in the valuation equation, I use the same set of control variables used in Eq. (1) except that year dummies are excluded. The equations are as follows: Div=Earn ¼ g0 þ g1 Q þ g2 Size þ g3 Salesgrowth þ g4 Ext X fin þ g5 ROE þ g6 Debt=Totalassets þ Fixedeffects þ u

ð6Þ

Q ¼ g0 þ g1 Div=Earn þ g2 Size þ g3 Salesgrowth þ g4 ROE þ g5 Debt=Totalassets þ g6 Age þ e

ð7Þ

According to column 1 of Table 9, the GMM estimation result shows that F-statistics are significant at the 0.01 level, while Hansen J-statistics are not significant, confirming the relevance and validity of instrument variables.30 In 30 According to Baum et al. (2003), “good instruments” should be both relevant and valid: correlated with the endogenous repressors and at the same time orthogonal to the errors. F-statistics test the relevance and Hansen J-statistics test the validity of instrument variables. A significant F-value suggests the relevance of instrument variables, while an insignificant J-value suggests the validity of instrument variables.

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Table 7 Valuation and dividend payout ratio H&R Independent variables (1) Div/Earn

Matched A Matched HK H&R

Matched A Matched HK H&R

Matched A H&R

Matched A

(2)

(8)

(9)

(10)

0.850⁎a (2.37) 1.721 (1.33) 0.249 (0.64) 0.629 (0.68) −0.237⁎a (−1.98) −0.059 a (−0.72) 0.576 (1.73) −1.014 a (−1.01) −0.019 (−1.12) .281 550

− 0.495 (−1.75) 1.773 (1.66) 0.278 (0.49) − 0.487 (−0.36) − 0.589⁎⁎ (−3.10) 0.401 (1.39) 1.360 (1.68) − 7.485⁎⁎ (−5.50) − 0.090 (−0.78) .366 591

0.836⁎a −0.417 (2.32) (−1.30)

(3)

(4)

(5)

(6)

(7)

0.132⁎ (2.04)

0.843⁎a (2.37) 1.625 (1.26)

− 0.489 (−1.64) 1.626 (1.51)

0.214⁎⁎ (2.50) −1.399 (− 1.35)

0.851⁎a − 0.419 (2.36) (−1.40)

Own_cctr1 CMB Magt Size Salesgrowth ROE Debt/Total assets Age Adj-R2 Observations

−0.214 a (−1.81) −0.073 a (−0.99) 0.677⁎ (1.95) −0.609 a (−0.65) −0.027 (−1.59) .276 560

−0.513⁎⁎ (−2.96) 0.405 (1.47) 1.428 (1.82) −7.831⁎⁎ (−5.90) −0.117 (−1.60) .350 592

−0.550 (− 1.63) −0.060 (− 0.89) 0.194 (1.64) 4.579⁎ (1.99) 0.045 (1.02) .167 384

− 0.217 a (−1.80) − 0.065 a (−0.80) 0.571 (1.70) − 0.990 a (−1.01) − 0.020 (−1.21) .279 553

− 0.580⁎⁎ (−3.05) 0.396 (1.37) 1.378 (1.74) − 7.479⁎⁎ (−5.52) − 0.091 (−0.80) .365 592

−0.667 (− 1.52) −0.102 (− 1.27) 0.421 (1.78) 5.667 (1.77) 0.061 (1.01) .249 318

0.240 (0.62) 0.478 (0.50) − 0.197 a (−1.76) − 0.057 a (−0.74) 0.600 (1.80) − 0.977 a (−0.98) − 0.022 (−1.33) .277 551

0.039 (0.07) − 0.115 (−0.09) − 0.513⁎⁎ (−2.97) 0.405 (1.47) 1.426 (1.79) − 7.839⁎⁎ (−5.80) − 0.117 (−1.04) .359 591

This table reports the valuation effect of dividend payout ratio for the 123 HK-listed Chinese firms, 123 matched Mainland-listed firms and 123 industry- and size-controlled HK local firms from 1999 to 2003. The dependent variable is Tobin's Q. Independent variables are dividend payout ratio (Div/Earn), CMB, Magt, Own_cctrl, Size, Salesgrowth, ROE, Debt/Totalassets and Age. All the variables are the same as Table 2 and Table 3. Constant and year dummies are included in regressions but not reported. Standard errors adjusted for both heteroskedasticity and within correlation clustered by firm. t-statistics are reported in parentheses below each coefficient. ⁎⁎ and ⁎ denote statistically significantly different at the 1 and 5% level respectively. a Denotes coefficient in H&R regression is significantly different from that in matched A regression at p b 10%.

column 3, when Tobin's Q is used as the dependent variable, the coefficient on dividend payout ratio is significantly positive. In column 2, when dividend payout is used as the dependent variable, the coefficient on Tobin's Q has the right (positive) sign but is not significant. Moreover, the results are quite similar when CMB, Magt, and Own_cctrl are included as independent variables in Eq. (6) (not reported). These results point out that dividend payout seems to be the cause of Tobin's Q, strengthening the findings in Table 7. 6. Conclusions and future studies This study shows that HK-listed Chinese firms have a board with more managerial influence compared to Mainlandlisted firms: the former have more cases of combined titles of board chair and CEO and a larger fraction of managers on the board. Furthermore, HK-listed firms have more concentrated ownership, even though both groups are dominated by a single large shareholder. The test of the effects of board structure shows that Mainland-listed firms with combined title of CEO and board chair tend to pay lower cash dividends, but there is no such evidence about HK-listed firms. The results also show that the fraction of managers on the board is associated with lower dividend payouts in both groups. The relation is stronger in Mainland-listed firms, indicating that managers' influence in the board creates more serious agency problems. In addition, ownership concentration of Mainland-listed firms tends to weaken the association between managerial membership on the board and lower cash dividends. Nevertheless, there is no such evidence about dominant shareholders of HK-listed firms. This indicates that controlling shareholders in the Mainland reduce the agency cost of free cash flows. In addition, the test of the valuation effects of dividends shows that the market in Hong Kong pays price premium to higher dividend payout, both for Chinese firms and local firms. However, dividend payout of matched A-share firms is not associated with higher valuations.

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Table 8 Selection bias test Panel A: Listing Logit model (first stage) This panel reports the results of the Logit model as follow: HK = γ0 + γ1 Size + γ2 Salesgrowth + γ3 ROE + γ4 Debt/Totalassets + Fixedeffects + φ The dependent variable is an indicator variable that takes the value one (zero otherwise) if the firm is of HK-listed. Independent variables are Size, Salesgrowth, ROE, Debt/Totalassets, and year dummies. The sample consists of the 123 HK-listed Chinese firms and 123 matched Mainland-listed firms. Variable

Coefficient

SE

Chi-square

Prob. (Two-sided)

Constant Size Salesgrowth ROE Debt/Totalassets LR statistic (4 df): 8.13

− 0.131 0.026 0.031 − 0.016 − 0.405 Probability (LR statistic): .084

0.281 0.024 0.044 0.051 0.155 Observations: 1194

0.218 1.132 0.498 0.097 6.818

0.640 0.287 0.480 0.756 0.009

Panel B: Analysis of dividend rates on performance and board structure (second stage) This panel reports the Tobit analysis of dividend rates on board structure after controlling for the selection bias. The dependent variable is dividend payout ratio. Inv. Mills Ratio is the inverse Mills ratio computed from the Logit model in panel A. All the other independent variables are the same with Table 4. Constant and year dummies are included in regressions but not reported. The sample consists of the 123 HK-listed Chinese firms. t-statistics are reported in parentheses below each coefficient. ⁎⁎ and ⁎ denote statistically significantly different at the 1 and 5% level respectively. Independent variables

(1)

(2)

CMB

0.422 (1.37)

0.402 (1.30)

0.464⁎ (2.00) −0.719⁎ (−2.18) −0.157 (−0.96) −0.133⁎ (−2.44) 0.028 (0.55) 6.351⁎⁎ (3.01) 2.764⁎⁎ (9.63) 13.935⁎ (2.33) .112 521

0.417 (0.47) 0.593⁎ (2.26) − 0.746⁎ (−2.24) − 0.194 (−1.17) − 0.137⁎⁎ (−2.52) 0.023 (0.45) 6.671⁎⁎ (3.12) 2.737⁎⁎ (9.52) 14.512⁎ (2.40) .112 515

Magt Own_cctr1 ROE Salesgrowth Size Ext_fin Cash_rev Debt/Totalassets Prev Inv. Mills Ratio Pseudo-R2 Observations

(3)

(4)

− 1.696⁎ (− 2.05)

− 1.679⁎ (− 2.01) 0.133 (0.15) 0.601⁎ (2.30) − 0.778⁎ (− 2.33) − 0.147 (− 0.88) − 0.133⁎⁎ (− 2.46) 0.023 (0.47) 6.803⁎⁎ (3.19) 2.660⁎⁎ (9.29) 14.744⁎ (2.45) .113 512

0.603⁎ (2.32) − 0.784⁎ (− 2.37) − 0.147 (− 0.89) − 0.132⁎⁎ (− 2.45) 0.024 (0.48) 6.842⁎⁎ (3.24) 2.656⁎⁎ (9.30) 14.849⁎⁎ (2.49) .113 513

Panel C: Analysis of ownership concentration's impact (second stage) This panel reports the Tobit analysis of the impact of ownership concentration after controlling for the selection bias. The dependent variable is dividend payout ratio. Inv. Mills Ratio is the inverse Mills ratio computed from the Logit model in panel A. All the other independent variables are the same with Table 5. Constant and year dummies are included in regressions but not reported. The sample consists of the 123 HK-listed Chinese firms. t-statistics are reported in parentheses below each coefficient. ⁎⁎ and ⁎ denote statistically significantly different at the 1 and 5% level respectively. Independent variables

(1)

CMB

0.106 (0.27) 0.739

CMB ⁎ H_own_cctrl

(2)

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Table 8 (continued ) Independent variables

(1)

CMB ⁎ H_own_cctrl Magt

(1.17)

(2) −2.206⁎ (− 2.15) 1.552 (0.93) −0.171 (− 0.35) 0.604⁎ (2.32) −0.787⁎⁎ (− 2.38) −0.170 (− 1.02) −0.135⁎⁎ (− 2.52) 0.021 (0.41) ⁎⁎ 6.865 (3.24) 2.672⁎⁎ (9.38) 15.034⁎⁎ (2.51) .114 513

Magt ⁎ H_own_cctr1 H_own_cctr1

0.132 (0.48) 0.462⁎ (1.97) − 0.691⁎ (− 2.10) − 0.171 (− 1.04) − 0.132⁎ (− 2.43) 0.040 (0.40) 6.161⁎⁎ (2.93) 2.751⁎⁎ (9.64) 13.550⁎ (2.27) .113 522

ROE Salesgrowth Size Ext_fin Cash_rev Debt/Totalassets Prev Inv. Mills Ratio Pseudo-R2 Observations

Panel D: Valuation of dividend payout ratio (second stage) This panel reports the valuation effect of dividend payout ratio for the 123 HK-listed Chinese firms after controlling for the selection bias. The dependent variable is Tobin's Q. Inv. Mills Ratio is the inverse Mills ratio computed from the Logit model in panel A. All the other independent variables are the same with Table 7. Constant and year dummies are included in regressions but not reported. Standard errors adjusted for both heteroskedasticity and within correlation clustered by firm. t-statistics are reported in parentheses below each coefficient. ⁎⁎ and ⁎ denote statistically significantly different at the 1 and 5% level respectively. H&R

H&R

H&R

H&R

Independent variables

(1)

(2)

(3)

(4)

Div/Earn

0.839⁎ (2.33)

0.851⁎ (2.39) 1.763 (1.35)

0.858⁎ (2.38)

0.858⁎ (2.39) 1.862 (1.43) 0.253 (0.64) 0.629 (0.67) − 0.042 (− 0.15) 0.351 (0.75) 0.460 (1.29) − 4.002 (− 0.98) − 0.020 (− 1.20) − 8.404 (− 0.89) .283 550

Own_cctr1 CMB Magt Size Salesgrowth ROE Debt/Totalassets Age Inv. Mills Ratio Adj-R2 Observations

−0.126 (−0.48) 0.111 (0.25) 0.628 (1.75) −1.928 (−0.51) −0.026 (−1.62) −3.777 (−0.43) .276 560

− 0.023 (−0.09) 0.342 (0.73) 0.457 (1.28) − 3.960 (−0.98) − 0.022 (−1.29) − 8.352 (−0.89) .281 553

0.244 (0.62) 0.467 (0.49) − 0.031 (− 0.12) 0.285 (0.61) 0.505 (1.42) − 3.469 (− 0.86) − 0.023 (− 1.43) −7.016 (− 0.75) .278 551

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Table 9 GMM and three-stage least square estimation of the relation between valuation and dividend payout ratio for Chinese firms listed in HK GMM

Independent variables

Dependent variable = Q

Dependent variable = Div/Earn

Dependent variable = Q

(1)

(2)

(3)

Q Div/Earn Size Salesgrowth

3.599⁎⁎ (2.50) − 0.422⁎⁎ (− 3.08) − 0.042 (− 0.49)

Ext_fin ROE Debt/Totalassets Age Year dummies F-stat Hansen J-stat x2-stat Observations

3SLS

0.615⁎ (1.94) − 0.903⁎⁎ (− 2.57) 0.011 (0.28) No 31.39⁎⁎ 1.26 536

0.361 (1.56) 0.118⁎ (2.14) 0.027 (0.38) 0.012 (0.33) − 0.236 (− 1.32) 0.252⁎⁎ (11.34)

Yes 171.36⁎⁎ 536

3.580⁎⁎ (3.42) − 0.366⁎⁎ (− 2.49) − 0.075 (− 0.31) 0.643⁎⁎ (2.63) − 0.896⁎⁎ (− 3.29) 0.013 (0.33) No 26.58⁎⁎

This table reports the results of three-stage least squares estimation of the following systems of equations: Div=Earn ¼ g0 þ g1 Q þ g2 Size þ g3 Salesgrowth þ g4 Ext X fin þ g5 ROE þg6 Debt=Totalassets þ Fixedeffects þ u Q ¼ g0 þ g1 Div=Earn þ g2 Size þ g3 Salesgrowth þ g4 ROE þ g5 Debt=Totalassets þg6 Age þ e All the variables are the same with Table 3. Instrument variables are Size, Salesgrowth, Ext_fin, ROE, Debt/Totalassets, Age, and year dummies. GMM denotes GMM estimates as well as additional diagnostic tests about instrumental variables. 3SLS denotes results from three-stage least square estimation. The sample consists of 123 HK-listed firms. Standard errors adjusted for heteroskedasticity. Z-values (in parentheses) are reported. F-stat is based on relevance test of instrumental variables. J-stat is based on overidentifying restrictions test about instrument variables. x2-stat is based on three-stage least squares estimation. ⁎⁎ and ⁎ denote statistically significantly different at the 1 and 5% level respectively.

Taken together, this study indicates that the pricing mechanism of Hong Kong's equity market appears to encourage managers of HK-listed firms to pay dividends. The same mechanism is not found to exist in Mainland's market. This difference helps to explain the finding that the controlling shareholders of HK-listed firms take a less active role in dividend policy than those of their peers in the Mainland. Thus, Hong Kong's equity market seems to provide a mechanism that can be used by Chinese firms listed there. One possible alternative interpretation of the results is that the Mainland markets don't value cash dividends, so managers don't have incentives to pay. In this interpretation, managers are not knowingly retaining earnings, they may just cater to, or even are forced by, investor demand. This alternative view is generally consistent with my results. At present, it is hard to identify managers' real intention—whether the more powerful managers pay less to cater investors or to expropriate investors? I take both views as related interpretations of the results, and leave the task of distinguishing between them to future work. Further study will focus on another market mechanism: stock price informativeness in guiding capital investment. Morck et al. (2000) show that stock prices of firms listed in Hong Kong are less synchronous than those listed in the Mainland. Preliminary analysis shows that stock prices of HK-listed firms are more associated with future capital investment. This finding suggests that stock prices of HK-listed firms tend to reflect more firm-specific information than the prices of matched Mainland-listed firms. I also find that result from the matched local companies is generally consistent with that of HK-listed Chinese firms. Thus, the pricing mechanism in Hong Kong's market seems to be more capable of guiding capital investment than that in the Mainland.

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Another branch of further study will combine the analysis of rights issues with dividend distribution. Rights issues provide a channel for existing shareholders to contribute cash to listed companies, thus they can be considered as negative cash dividends. Controlling shareholders can enjoy the same dividend rates with minority shareholders, at the same time, they have the choice to forgo the rights to purchase shares in rights issues, while minority shareholders have to subscribe all the shares in rights issuing.31 Thereafter, the “net” dividends received by controlling shareholders might be higher than those received by minority shareholders. Firms may undergo rights issues and distribute dividends at the same time for controlling shareholders to “cash out”. This is a sign of expropriation by controlling shareholders. Consequently, it would be interesting to examine cashing out incentives of controlling shareholders in HK-listed and Mainland-listed firms to obtain evidence with regard to corporate governance status. Finally, given the gradual increase in family controlled Chinese firms, further study may explore the impact of shareholder identity. During the past several years, there are more private firms listing in the Mainland and in Hong Kong. The portion of family controlled firms is expected to increase after the Chinese split share structure reform initiated in August 2005.32 Once managers are majority shareholders, cash dividend plays a less important role as a monitoring mechanism of controlling shareholders. Instead, one should try to examine dividend based on minority shareholder monitoring role or controlling shareholder protection role. Consequently, shareholder identity (i.e., whether the controlling shareholder is a SOE or individual) should be considered or controlled in the research. Appendix A. The trend for the portion of payers Sample “H&R” refers to 65 H-share and 58 red chip companies; sample “A” indicates 123 industry- and sizecontrolled A-share companies; sample “HK” refers to 123 industry- and size-controlled local Hong Kong companies. Payers pay cash dividend during specific year. Data source for H-share, red chip and local Hong Kong companies is Reuters, data source for A-share is Genius.

31 Lee and Xiao (2004) show that, on average, the controlling shareholders of Mainland-listed firms only subscribe 29% of the shares allocated to them in rights offerings whereas minority shareholders subscribe 100%. 32 On August 23, 2005, the China Securities Regulatory Commission (CSRC), State-Owned Assets Supervision and Administration Commission of the State Council, Ministry of Finance, People's Bank of China and Ministry of Commerce jointly promulgated the Guidance Opinions on the Split-Share Structure Reform of Listed Companies (referred to as the “Guidance Opinions”). In line with the Guidance Opinions, the split-share structure reform is specifically designed to float the non-tradable shares of A-share listed companies and to balance the interests of shareholders via a negotiation mechanism. According to the Guidance Opinions, nearly all the shares will be tradable in 2008. By that time, it is easier for individual to obtain control of certain listed firms.

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Appendix B. The trend for dividend payout ratio of payers Dividend payout ratio is total dividends paid during the year divided by net income. Dividend is total cash dividends paid during the fiscal year (net of tax). Sample and data source are the same with Appendix A.

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