State Controlling Shareholders and Payout Policy

Abstract

We study the role of state controlling shareholders in corporate payout policy. The State Capital Operation Program in China requires parent central state-owned enterprises (CSOEs) to contribute part of their consolidated income to a new fiscal fund. We find that listed CSOEs, partially controlled by parent CSOEs, experience significant reductions in dividend payouts as the income-contribution ratio increases. The dividend reductions are concurrent with increases in intragroup resource transfers—listed CSOEs’ loans to, and commercial trades with, group peers. The program yields adverse consequences for listed CSOEs’ investment and employment, yet being mitigated by group-level dividend reductions.