Why Do Firms Pay Large Stock Dividends? Catering First and Cashing Out Next: Evidence from China

This study uses large stock dividends (LSDs) of Chinese listed firms from 1999 to 2018 to study the purpose of their issuance. We find that turnover rate and stock liquidity do not increase significantly after LSDs are disbursed. Stocks respond positively to LSD announcements, whereas firms' buy-and-hold abnormal returns and operating performance deteriorate. Furthermore, managers first cater to investor sentiment by paying LSDs and then cash out their stockholdings for personal profit at the expense of shareholder wealth. The regulators in China and other emerging markets should protect investors' interests by preventing the potential abuse of LSDs.