Specifying Dividend Provisions in Response to Dividend Regulation: Evidence from China.

By exploring a unique setting wherein all Chinese listed firms were mandated to specify dividend provisions, we find such dividend regulation generates costs to firms. In particular, low agency cost firms tend to strengthen their dividend provisions. Firms strengthening dividend provisions raise more equity than other firms, at least in a subsample with high dependence on equity. These firms incur higher costs than other firms when issuing equity. All these findings highlight the regulatory cost imposed by dividend regulation. In addition, investors downward revise their valuation of earnings if a firm misses its dividend provision, maintaining the observed separating equilibrium. [ABSTRACT FROM AUTHOR]