Stock Versus Cash Dividends: Signaling or Catering

Abstract

This paper examines why firms choose to pay stock dividends. Using a sample of listed Chinese firms, we find that younger, more profitable firms, with lower leverage, high levels of retained earnings, private ownership prior to listing and investing more in fixed assets are more likely to pay stock dividends. Our evidence indicates that the initiation of a stock dividend is associated with a significant positive market reaction and increased analyst following, consistent with firms using stock dividends to attract analysts’ attention. In contrast, firms with non-tradable shares are more likely to pay cash dividends, catering to investor demands.

Keywords: Dividend policy, stock dividend, cash dividend, signalling, China

JEL Classification: G32, G35