Mandatory Dividend Policy and Perk Consumption : Evidence from State-Owned Business Group in China

This study examines perk consumption in the business group when the unlisted parent firms experience an adverse shock of financial conditions. We exploit a quasi-experiment in China, the mandatory dividend of a state-owned business group in 2007, to conduct difference-in-differences estimation, and find that: (1) When parent central state-owned enterprises (parent CSOEs) are mandatorily required to pay dividend to the governments, their group-affiliated listed central state-owned enterprises (listed CSOEs) experience a substantial decrease in perk expenditures. (2) A plausible mechanism is that the adverse cash shock for parent CSOEs could reduce the resources under management control and alleviate the agency problems. (3) Our findings are more pronounced for firms with better internal and external governance. Overall, we provide the empirical evaluation of the economic consequences of mandatory dividend policy in terms of a firm’s perks within a state-owned business group