Political uncertainty, dividend policy adjustments and market effects

By studying Chinese firms that issued A-shares in the Shanghai and Shenzhen markets from 2004 to 2010, we examine how political uncertainty, caused by a change of Party chief at the municipal level, affects firms’ cash dividend decisions. We find that political uncertainty leads to a more prudent cash dividend policy. First, non-dividend-payers are less likely to initiate dividends due to political uncertainty. Secondly, political uncertainty significantly reduces the level of dividend payments. Compared with privately-owned firms, state-owned firms are more likely to adopt prudent cash dividend policies. The prudent adjustments of cash dividend policies due to political uncertainty have significant positive market effects.